Democrats are slamming the Fed for not cutting interest rates
Democratic Senator Elizabeth Warren is fuming at the Federal Reserve for delaying interest rate cuts until September.
“Fed Chair Powell made a serious mistake not cutting interest rates. He’s been warned over and over again that waiting too long risks driving the economy into a ditch,” Warren said on the X social media platform.
“Powell needs to cancel his summer vacation and cut rates now—not wait 6 weeks,” she said, referring to the upcoming FOMC meeting on Sept. 17-18.
Warren’s criticism came in response to a dismal July nonfarm payrolls report, which showed a surprise slowdown in hiring as the national unemployment rate rose to a nearly three-year high.
The jobs market has also risen half a percentage point from its 12-month lows, marking the beginning of a technical recession based on the closely watched Sahm Rule.
It’s not the first time Warren has criticized the central bank for leaving interest rates elevated.
In 2023 and early 2024, she and fellow Democrats penned several letters to Chairman Powell urging him to lower financing costs for Americans and small businesses.
The difference is that, back then, the Fed had a clear mandate to reduce inflation. Now, economists worry the central bank is overshooting its inflation mandate at the expense of other priorities.
The end result could be an accidental recession marked by poor policy choices and a delayed response.
The Fed is behind the curve
By voting to leave interest rates unchanged at its July 30-31 meeting, the Fed made a strategic blunder that went against the targets it set for itself, according to Wharton finance professor Jeremy Siegel.
“As far as inflation, we’re at 2.5%. We’ve gone down 90% toward the target on the inflation rate. We’ve overshot the target on the employment. Those are the two targets explicitly mentioned by the Federal Reserve,” Siegel said as he urged the central bank to hold an emergency meeting before September.
The Fed’s recent policy decisions make “absolutely no sense whatsoever,” he added.
Economists at JPMorgan Chase believe there’s a 30% chance that the Fed will keep rates “high for long,” which will increase the risk of a recession to 35% this year and 45% by the second half of 2025.
Analysts at Goldman Sachs say there's a 25% chance of a recession in the next year but warned that the odds depend largely on upcoming jobs data. Another dismal month of hiring could mean that the Fed is even further "behind the curve."
However, the Fed's swift reaction to dismal economic data could be counterproductive if markets take it as a sign of overreaction.
Former Fed boss and current Treasury Secretary Janet Yellen identified this problem all the way back in 2008 when she said emergency rate cuts could be “taken as a sign of panic.”
Nevertheless, futures markets bet there’s a more than 50-50 chance that the Fed will cut rates by 0.5% at its next meeting.