Fed ‘made a mistake’ by not cutting rates in July, former White House official says
The former deputy director of the White House National Economic Council believes the Federal Reserve “made a mistake” by not cutting interest rates in July.
Bharat Ramamurti, who served under President Joe Biden between 2021 and 2023, said the central bank should strongly consider cutting interest rates by 0.5% in September.
“If you look at hiring rates, quits, unemployment claims, there is data that suggests there is stress in the labor market now,” he said, according to Bloomberg.
“The Fed’s rates are far too restrictive for the rate of inflation we are seeing now,” he explained.
It’s not the first time that Ramamurti has criticized the Fed for delaying rate cuts. Shortly after the release of the disastrous July nonfarm payrolls report, Ramamurti told CNBC that the “Fed is behind the curve” and that it “missed an opportunity to start cutting rates in July.”
Now, policymakers find themselves between a rock and a hard place—trying to maintain a measured approach to monetary policy while rectifying the mistakes they made.
“I think that starting to cut in July would have been the measured approach,” Ramamurti told CNBC earlier this month. Now, “they’re behind the eight-ball a little bit, and maybe need to react more quickly in September by doing a larger cut.”
If Fed policymakers’ recent commentary is any indication, Ramamurti’s advice will probably be ignored when the central bank convenes next month.
Federal Reserve Bank of Atlanta President Raphael Bostic and Chicago Fed President Austan Goolsbee, who are both members of this year’s FOMC, have both stated that large rate cuts aren’t on the table.
Not succumbing to pressure
Despite maintaining political independence (for now), the Fed has been under enormous pressure from the general public to deliver a soft landing for the economy.
Jerome Powell’s tenure as Fed Chairman has been marred by controversy after policymakers fumbled their response to inflation in 2021-2022. Now, economists say the Fed risks making the same mistakes by delaying rate cuts more than they should.
Former St. Louis Fed president James Bullard has been in the hot seat before and knows how much is at stake. He thinks the Fed has been “looking for an opportunity to lower the policy rate” but didn’t get it until recently.
With inflation hitting multiyear lows and unemployment rising to multiyear highs, central bankers finally have the right conditions to act decisively.
Decisive action was the main takeaway from the FOMC’s July policy meeting, during which officials mostly agreed that a September rate cut would be warranted.
However, like Ramamurti, several prominent finance voices think the Fed won’t go far enough in cutting rates next month.
“I think you gotta get the funds rate to 4% quickly,” said BlackRock managing director Rick Rieder. He said several measures of consumer health, such as credit card delinquencies and auto loan charge-offs, are approaching crisis levels.
To get the federal funds rate down to Reider’s preferred level implies cuts of 1.50% from where it is now.