Former Fed official says central bank shouldn’t drag its feet on rate cuts

When it comes to interest rates, former New York Fed President William Dudley is no longer in the “higher-for-longer” camp.

In a new op-ed published in Bloomberg, Dudley, who currently serves on the Bretton Woods Committee, said the central bank should begin cutting interest rates before September.

“The facts have changed, so I’ve changed my mind,” Dudley said about the economy, which he believes could be headed for a recession.

“The Fed should cut, preferably at next week’s policy-making meeting,” he said.

Dudley is referring to the Federal Open Market Committee’s (FOMC) upcoming meeting on July 30-31, which analysts view as a mere formality. According to CME Group’s FedWatch Tool, the odds of a rate cut next week are less than 7%.

However, the odds spike to 100% for the September FOMC meeting, when policymakers are expected to cut rates by 0.25%.

While the difference between cutting in July and September doesn’t seem significant, Dudley believes there’s no reason to delay the inevitable.

With the exception of wealthy households, the rest of America has “generally depleted what they have managed to save” during the pandemic and are “feeling the impact of higher rates on their credit cards and auto loans,” he explained.

In Dudley’s view, cash-strapped Americans need all the help they can get in managing their expenses.

Not everyone will feel the impact of rate cuts

The Fed's federal funds rate has an effect on most consumer loans, most notably mortgages and auto loans.

The mere expectation of a September rate cut has sent Treasury yields tumbling. In turn, the 30-year fixed mortgage rates posted their sharpest drop in four months.

Credit cards are an entirely different story. According to Fed data, roughly half of the increase in credit card APRs over the last ten years was entirely profit-motivated.

A big reason why credit card companies can get away with charging massive interest fees is they don’t face enough competition. According to the CFPB, the 30 largest credit card providers account for 95% of the country’s total credit card debt.

So, while Dudley may be right about the need to lower interest rates, some Americans may not enjoy lower borrowing costs even if the Fed follows through on its September cut.

Meanwhile, Americans are racking up more and more debt, which means more of their income goes toward paying down high-interest balances.

According to the New York Fed, Americans collectively owed $1.12 trillion in credit card debt as of the first quarter of 2024, which is just below the all-time high set during the previous quarter.