Who's afraid of the Biden-Harris economy?
If the Biden-Harris Administration's policies aren't hurting the economy, why are leading Democrats calling for the Federal Reserve to announce massive interest rate cuts?
Three Democratic U.S. senators sent a letter to Federal Reserve Chairman Jerome Powell on Monday. Urged the central bank to cut interest rate target by three-quarters of a percentage pointHe argued that the time to cut interest rates “now and quickly” was right, warning that “it may already be too late.”
“If the Fed is too cautious in cutting interest rates, it risks needlessly tipping the economy into recession,” the senators said. Elizabeth Warren, Sheldon Whitehouse, John Hickenlooper said letter The letter to Chairman Powell read, “The Committee should consider lowering interest rates more aggressively up front to mitigate potential risks to the labor market.”
The history of deep cuts is not pretty
Such a large cut in interest rates is not unprecedented. But typically, when the Fed starts to cut rates, The economy is already in crisisAnd even in recessions, the Fed typically acts slowly.
Before the pandemic, the last time the Fed cut rates by more than 75 basis points was in 2008. We have to go back to 1984.In October 1960, the Fed reduced the effective federal funds rate from 11.30% to 9.99%, and in December, it reduced it from 9.43% to 8.38%. These Reagan-era cuts predated the modern era of explicit federal funds rate targets and left the market guessing as to what the Fed was planning to do with interest rate policy.
Today, there is no justification for such drastic cuts. The demand for cuts seems highly politicalThe senators appear to want the Fed to effectively and decisively declare that the Biden-era inflation crisis is over, just eight weeks before the presidential election.
But a super-sized cut would probably say more than that: In the senator's words, a cut of that size would signal that the Fed believes a sharp increase in interest rates is necessary for economic growth. Avoiding potential crises That would not be a vote of confidence in the Biden-Harris economy.
However, X jokers seem to enjoy the idea that “bigger is better” when it comes to cuts.
Wall Street expects 50 basis point rate cut
Wall Street doesn't see a cut of that magnitude likely, but interest-rate bets in the federal funds futures market suggest a 50-basis-point cut is more than 50% likely. Traders were pricing in a cut as of Monday afternoon, just two days before the Fed's announcement. There is a 61 percent chance of a 0.5 percentage point cut. The chances of a quarter-point cut are just 49 percent.The yield on the two-year Treasury note, which is particularly sensitive to expectations about Fed policy, fell 0.015 percentage point on Monday to its lowest level in two years.
It starts with big cuts — as Wall Street calls them Bringing cuts forward—It would also create a strange asymmetry. When the Fed finally started raising rates in March 2022, it started with just a quarter-point increase. Then it moved to half-point hikes and finally four quarter-point hikes. If the Fed felt it needed to proceed cautiously then despite clearly worsening inflation problems, why rush now?
A larger rate cut would also increase error costs if inflation does not continue to fall toward 2 percent. It would cause financial turmoil if the Fed had to reverse its 25 basis point rate cuts several times because inflation rekindled. Having to reverse them after a large rate cut could undermine confidence in the Fed's ability to deliver. In other words, smaller rate cuts would be more costly. The Fed’s reputational risk is significantly reduced.
Cynics might say that Senate Democrats are well aware that the Fed is unlikely to cut rates as much as they are asking, but by asking for a big cut now, they may be thinking they are making some purchases. Your own reputation insurance If the economy goes into a downturn next year, they will be able to argue that it was the Fed's overly cautious approach that caused the recession, not the Biden-Harris Democratic policies.
