Interest Rate Cut Demands Surge as Fed Meeting Approaches

Interest Rate Cut Demands from Political Leaders

Three prominent Democrats urged Federal Reserve Chair Jerome Powell on Monday to cut interest rates by 75 basis points, warning that the central bank may have delayed too long. The central bank is poised to announce rate cuts Wednesday following over a year at the two-decade high range of 5.25 to 5.5 percent.

While Powell signaled in December that rate cuts were on the horizon, sticky inflation this spring delayed his timeline as the Fed watched for inflation to continue falling. Inflation clocked in at 2.5 percent in August, lower than anticipated and a significant reduction from its peak of 9.1 percent in June 2022.

Concerns Raised by Lawmakers

“It is clearly the time for the Fed to cut rates. In fact, it may be too late: your delays have threatened the economy and left the Fed behind the curve,” Sens. Elizabeth Warren (D-Mass.), Sheldon Whitehouse (D-R.I.), and John Hickenlooper (D-Colo.) wrote in a letter to Powell.

The unemployment rate has edged up from 3.5 percent in July 2023 to 4.2 percent in August, although it remains low by historical standards. “Employment numbers adjust slowly, so the Fed should frontload rate cuts to avoid sliding towards a potential crisis,” the lawmakers stated.

Market Forecasts and Political Implications

A 75 basis point cut is highly unlikely, although the lawmakers emphasize that a rate of 4.5 to 4.75 percent would remain above levels seen between November 2007 and January 2023 if implemented. A majority of interest rate traders are forecasting a 50 basis point cut, according to the CME FedWatch tool.

Some Democrats, including Warren, have urged Powell to cut rates for months, citing the burden of high borrowing costs on Americans and its adverse effects on housing affordability. From a contrasting political angle, former President Trump accused Powell of being ‘political’ and suggested he would reduce rates ahead of the November election to benefit the Democratic Party. However, the Fed is a politically independent agency, and Powell has reiterated that decisions on rate cuts will be data-driven, not influenced by policy.