(Bloomberg) -- Three Democratic senators urged Federal Reserve Chair Jerome Powell and fellow policymakers to aggressively cut the central bank’s benchmark interest rate, including by 75 basis points this week, to protect the US economy from potential harm.
“If the Fed is too cautious in cutting rates, it would needlessly risk our economy heading towards a recession,” Sens. Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper said in a letter sent Monday to Powell. “The Committee must consider implementing rate cuts more aggressively upfront to mitigate potential risks to the labor market.”
The letter highlights the thorny political backdrop surrounding the Fed as it prepares to lower interest rates for the first time since 2020 in a bid to bolster a softening jobs market. While officials have repeatedly maintained that policy decisions won’t be influenced by partisan considerations, they continue to face scrutiny from several political corners.
Those range from lawmakers who think the Fed is responding too tentatively, to former President Donald Trump who has said the Fed shouldn’t adjust rates ahead of the presidential election. His comments drew a critical response from Vice President Kamala Harris, his rival for the White House this fall, who said she would respect the Fed’s independence if elected.
Fed officials have clearly telegraphed a rate cut at their meeting this week but have been more circumspect about the potential size of the reduction, leaving investors guessing.
As of Monday, investors saw roughly even odds for a quarter- or half-point cut. Officials will issue their policy decision on Wednesday at the conclusion of their two-day meeting.
A cut of 75 basis points, or 0.75%, would be much larger than the usual quarter-point move. Fed policymakers have typically reserved more drastic policy adjustments for economic emergencies. Policymakers last adjusted rates by 75 basis points in 2022, when they implemented four consecutive rate hikes of that size in an effort to quell the steepest inflation surge in decades.
While Fed officials have acknowledged a slowing labor market, they continue to describe the jobs landscape as sound.
With inflation now trending down toward the Fed’s 2% goal and continued signs of cooling in the labor market, “now is the time to swiftly move forward with rate cuts,” the senators wrote in their letter.
“Employment numbers adjust slowly, so the Fed should front-load rate cuts to avoid sliding towards a potential crisis,” they said.
A Fed spokesperson said, “We have received the letter and plan to respond.”
Fed officials have held their policy rate steady since last July in a range of 5.25% to 5.5% — the highest level in more than two decades — restraining the economy. Warren, Whitehouse and Hickenlooper wrote previously to Powell this year urging the central bank to begin rate cuts.
Fed Independence
Their letter Monday raised concerns anew that the central bank has been too slow to lower borrowing costs, echoing a sentiment among some investors and economists that reached a fever pitch after a disappointing July jobs report. Subsequent data also suggested the labor market is losing momentum.
“It is clearly the time for the Fed to cut rates,” the senators wrote. “In fact, it may be too late: Your delays have threatened the economy and left the Fed behind the curve.”
Fed officials have laid the groundwork for the start of rate cuts by acknowledging a slowdown in both the labor market and inflation, and emphasizing the central bank’s dual responsibilities of maintaining maximum employment and stable prices. That could help ward off criticism from Republicans, some of whom have expressed wariness over the Fed adjusting rates just weeks ahead of the presidential election. Trump said in June that the Fed lowering rates prior to the election is “something that they know they shouldn’t be doing.”
His candidacy has raised speculation that the decades-long precedent of allowing the Fed independence in setting interest rates could come under threat should he win. He said in August he felt strongly the president should have a “say” on monetary policy. Trump also criticized Powell, saying the Fed chair had been “a little bit too early and a little bit too late” on policy decisions.
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