In summary
- Senator Elizabeth Warren pushed the Federal Reserve to slash interest rates, arguing that high borrowing costs have threatened the U.S. economy for too long.
- Warren, along with Senators John Hickenlooper and Sheldon Whitehouse, called for a 75 basis point rate cut in a letter to Fed Chair Jerome Powell.
- Lawmakers argued that a rate cut is necessary because of deteriorating labor market health and falling inflation, citing downwardly revised employment data and a rise in the unemployment rate.
Senator Elizabeth Warren is pushing the Federal Reserve to slash interest rates, arguing that high borrowing costs have threatened the U.S. economy for too long.
“Now is the time to move quickly with rate cuts,” the Massachusetts senator wrote in a letter to Fed Chair Jerome Powell. The letter was also signed by Sens. John Hickenlooper (D-CO) and Sheldon Whitehouse (D-RI).
In the letter, lawmakers called for a 75 basis point rate cut. Meanwhile, traders expect the U.S. central bank to cut its benchmark rate from a 23-year high by 0.25% or 0.5% on Wednesday.
Bitcoin price rose on Friday as traders digested Wall Street Journal and Financial Times articles suggesting Wednesday’s rate-cut decision could be a tight one. As of this writing, traders see a 57% chance the Fed will undertake a series of rate cuts with a 50-basis-point drop. A month ago, traders were pricing in a 25% chance, according to the CME Group’s FedWatch tool.
While rate cuts are typically bullish for risk assets like stocks and cryptocurrencies, Warren and others argued for an extra-large cut based on the deteriorating health of the labor market. With inflation clearly on the decline, it is dangerous for the Fed not to quickly reduce borrowing costs, they wrote, pointing to March jobs data that was revised down by 818,000 positions last month.
At the same time, lawmakers described a rise in the unemployment rate to 4.2% as a worrying sign for the US economy, citing a record low of 3.5% last July.
“While the economy remains broadly robust, this weakening labor market provides additional justification for cutting rates,” the lawmakers wrote. “Employment numbers are slow to adjust, so the Fed should bring forward rate cuts to avoid sliding into a potential crisis.”
Taking a measured approach to rate cuts would unnecessarily put the U.S. economy at risk, the senators argued. They backed up their call by echoing an earlier comment by Powell, in which he stated emphatically that the Fed does not “welcome a further cooling in labor market conditions.”
Less than a week ago, however, a cautious approach was considered the Fed’s baseline scenario, and after an inflation reading last week showed core inflation, a measure that excludes volatile food and energy prices, holding steady, the market was leaning toward a 25-basis-point move. At the time, analysts feared the Fed could “spook” the market with a 50-basis-point cut.
While the senators’ proposed cut could exacerbate fears of a slowdown, some experts have recently called for a 75-basis-point cut. For example, when markets resisted a global sell-off last month, Wharton Business School Professor Jeremy Seigal called for cutting rates immediately.
Although Seigal, who is also a senior economist at WisdomTree, later withdrew his call, Seigal said at the time that markets would “shoot higher” if the Fed were to cut that sharply.
Warren, a Cryptocurrency skeptic, has caused a stir in the industry by calling for stricter regulations. She described “shadowy super-coders” as a looming threat to the financial system in 2021, and raised national security concerns with “foreign adversaries” operating cryptocurrency Mining farms in July.
Because of Warren’s comments on cryptocurrencies, she has said that the crypto industry is against her. Currently, John Deaton, a cryptocurrency lawyer, is running for her Senate seat, campaigning against her with over a million dollars in outside support from Ripple Labs.
Still, by advocating for a 75 basis point cut, it appears Warren and the crypto industry have found common ground, at least when it comes to the chances of the Fed cutting rates vigorously.
Edited by Andrew Hayward
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