Finally! ‘Too Late’ Powell Considers Rate Cuts

Recently, Federal Reserve Chair Jerome Powell hinted at a potential shift in his stance regarding interest rate cuts. He remarked, “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” This suggests he is considering a rate cut as early as September.

As I have pointed out in numerous previous columns, the Federal Funds Rate (FFR) — which the Federal Reserve directly controls — is currently too high and clearly in the restrictive range. The neutral rate should be between 3.25% and 3.5%. However, today the rate sits a full percentage point above this range, reinforcing its restrictive classification.

Powell also referenced a “shifting balance of risks.” It’s important to note that he made a critical misstep when he prioritized the unemployment risk during a period when inflation was surging from 1.4% to an alarming 9.1% between January 2021 and June 2022.

Since June 2022, Powell has focused on the inflation risk. That was welcomed even if it was a year and a half “too late.” Since last April, the top priority for “too late” Powell should have been the weakness in the job numbers

In April, we learned that gross domestic product growth for the first quarter was negative. While there may have been some unusual circumstances affecting this figure, the overarching trend showed an economy in decline. It wasn’t until July that we finally received accurate updates revealing that job growth was lackluster in May, June, and July.

The Fed should have shifted away from a restrictive position and moved to a neutral position. That means interest rates should have been cut in May, June, and July, so today the FFR would have dropped at least 100 basis points or 1%.

As is often the case with individuals in Powell’s position, he tends to be non-committal in his language. His statement included the phrase “may warrant adjusting our policy,” reflecting his reluctance to be decisive, possibly due to anticipated developments before the Fed’s next meeting in three weeks.

While Powell sets the agenda for these meetings and most governors tend to align with him, he cannot be entirely certain how each member will vote. A clearer position from Powell, communicated as early as possible, would help alleviate uncertainty in the financial markets. Presently, we only have probabilities assigned by financial experts regarding the likelihood of rate cuts, but the need for lower interest rates is immediate.

The excessively high, restrictive interest rates that have burdened the economy for more than two years and have placed immense pressure on consumers, businesses, and the federal government.

Businesses continue to pay steep rates on their debt, which curtails profits and stifles growth. Consumers find themselves priced out of the housing market due to soaring mortgage rates. Many Americans are reluctant to sell their homes, even when it may be the prudent choice, as they are locked into mortgages below 3% and face new rates around 7%.

The high interest rates are also costing the government hundreds of billions. The debt currently being issued carries a 4% to 5% rate, while maturing bonds sold ten or twenty years ago bear interest rates around 2%. This situation more than doubles the interest expense on all refinanced debt — an unsustainable predicament.

Let’s hope that “too late” Powell finally decides to cut interest rates in three weeks. While he will likely approach this cautiously — probably opting for a modest 25-basis point cut — there is a strong case for a more significant reduction of 50 to 100 basis point cut is warranted, especially since rates should have been cut in May, June, and July.

The economy is set to take off. New technology, an increased manufacturing basis, less regulation, and low tax rates will lead to long-term economic growth. All that is needed now is reasonably priced debt.

To be fair, Powell would say that he is worried about the inflationary impact of tariffs. He shouldn’t be.

So far, the data indicates some upward pressure on prices from tariffs, but that upward pressure is more than offset by declining energy price, which will decline further this Fall.

It’s time for the Fed to start “adjusting our policy stance.”

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