If the Biden-Harris administration’s policies are not hurting the economy, why are prominent Democrats urging the Federal Reserve to announce a super-sized interest rate cut?urging the central bank to slash its interest rate target by three-quarters of a percentage point
“If the Fed is too cautious in cutting rates, it would needlessly risk our economy heading towards a recession,” Senatorsaddressed to Powell. “The Committee must consider implementing rate cuts more aggressively upfront to mitigate potential risks to the labor market.”Such a large cut would not be unprecedented. But typically when the Fed starts cutting rates,Prior to the pandemic, the last time the Fed cut rates by 75 basis points or more was 2008.
But a super-sized cut would likely communicate much more than that. In the words of the senators, a cut of that size would indicate that the Fed believed a sudden lurch in rates is necessary toThat would not be a vote of confidence in the Biden-Harris economy. A large cut would also increase the error cost if inflation turns out not to continue to decline toward two percent. If the Fed had to reverse a few 25 basis point cuts because inflation reignited, that would cause some financial turmoil. If it has to reverse itself after a very large cut, that could undermine confidence in the Fed’s competence.
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