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Fed Should Cut Interest Rate as Restrictive Stance Adds to Inflation, Democrats Say

In Business
June 11, 2024
  • Now is the time to cut rates, three Democrat senators said in a letter to the Fed on Monday.

  • The Fed should move away from its 2% inflation target, the letter added.

The Federal Reserve (Fed) has kept the interest rate too high for too long and it’s time for a cut, three Democrat senators said Monday in a letter to the central bank’s chairman, Jerome Powell.

“We write today to urge the Federal Reserve (the Fed) to cut the federal funds rate from its current, two-decade-high of 5.5 percent. This sustained period of high interest rates is already slowing the economy and is failing to address the remaining key drivers of inflation,” Senators Elizabeth Warren (D-Mass.), Jacky Rosen (D-Nev.) and John Hickenlooper (D-Colo.) wrote, according to a document on the HuffPost website.

In response to the surprisingly resilient labor market, financial markets pushed out expectations for a first 25 basis-point interest-rate cut to September from July. The hawkish repricing has stalled a rally in bitcoin {{BTC}}.

The senators argue that the elevated interest-rate environment aimed at taming inflation adds to the problem by pushing up housing, construction and auto insurance costs, and risks propelling the economy into a recession that could ” push thousands of American workers out of their jobs.” In April, investment banking giant JPMorgan analysts said higher interest rates are spiraling into rent.

The senators said it’s time for the Fed to follow the European Central Bank’s lead and move away from the 2% inflation target. The ECB and Bank of Canada cut rates last week, diverging from the Fed’s higher-for-longer stance.

According to the letter, the divergence could lead to a stronger dollar and tighter financial conditions or flow of credit through various sectors of the economy. Tighter financial conditions often lead to economic slowdown.

Singapore-based crypto trading firm QCP Capital does not expect the divergence to last long and sees the drop in BTC and ether {{ETH}} prices as a buying opportunity.

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