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Anti-crypto Senator Warren Calls for 0.75% Fed Cut—But It Won’t Help the Economy

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Giuseppe Ciccomascolo
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Key Takeaways

  • The Federal Reserve will cut interest rates today, but the size of the cut remains a significant question.
  • Senator Warren advocates for a significant cut of 0.75%, but most analysts anticipate a more modest reduction.
  • A major rate cut could have mixed effects on the financial markets.

As the Federal Reserve prepares to announce its interest rate decision this week, there’s growing debate over the magnitude of the expected cut.

While many anticipate a rate reduction to stimulate the economy, Senator Elizabeth Warren and two colleagues have urged the Fed to take a more aggressive stance, calling for a three-quarter-point cut.

However, it won’t necessarily be positive for the economy and may also disrupt financial markets: stock, currency, and crypto.

Warren Wants Huge Cut

In a letter to Fed Chair Jerome Powell, Senators Warren, Sheldon Whitehouse, and John Hickenlooper argued that the Fed’s current monetary policy harms the job market and increases the risk of a recession. They cited cooling job growth and higher unemployment as evidence of the need for more decisive action.

“Given the Fed’s confidence in inflation moving towards its target of 2% and data indicating slower job growth, now is the time to swiftly move forward with rate cuts,” Warren wrote in the letter.

While Senator Warren and her colleagues have advocated for a bold 0.75% rate cut, such a move appears highly unlikely. The Federal Reserve is the only major central bank that has yet to lower interest rates. A substantial cut could negatively impact market sentiment, raising concerns about the overall health of the economy.

Furthermore, recent comments from FOMC members, including Powell, have indicated that a rate cut is possible. But they haven’t suggested anything as aggressive as 0.75%.

The consensus among policymakers seems to be leaning towards a more modest reduction, likely in the range of 0.25% to 0.50%.

Possible Markets Reactions

However, Wall Street investors and economists overwhelmingly disagree with Warren’s proposal. They believe a larger-than-expected cut could spook markets and raise concerns about the Fed’s economic outlook.

The consensus among market participants is that the Fed will likely cut rates by either a quarter-point or a half-point. A three-quarter-point cut, as advocated by Warren, is seen as highly unlikely.

Expectations on today's Fed's decision
Expectations on today’s Fed’s decision. l Credit: CME Watch

However, a Federal Reserve‘s surprise 0.75% rate cut would likely trigger mixed reactions.

Stocks will likely rise in the very short term, especially in tech sectors. However, volatility or a sell-off could occur if seen as a sign of economic trouble.

The U.S. dollar would weaken as lower rates make U.S. assets less attractive, benefiting emerging market currencies and increasing inflation expectations.

Consequently, crypto assets like Bitcoin (BTC) would likely surge. Investors may seek alternatives to a weakening dollar and hedge against inflation, fueled by increased liquidity and risk appetite.

The overall impact would depend on whether the market sees the cut as a stimulus or a response to deeper economic issues.

What Will Feds Do?

David Kelly, chief global strategist at JPMorgan Asset Management, cautioned  against overly aggressive rate cuts. He compared the process to moving a piano down a flight of stairs, emphasizing the need for a gradual and careful approach.

Ultimately, the Fed’s decision will have significant implications for the economy and financial markets. As the central bank weighs the competing pressures of stimulating growth and managing inflation, investors and policymakers alike will be closely watching the outcome.

Antonio Ernesto Di Giacomo, Senior Market Analyst at XS.com, told CCN: “Speculation about a more aggressive cut has gained traction following recent reports suggesting that the Federal Reserve may be considering this option. As inflation has decreased to 2.5%, some sectors believe the Fed has the room to act more decisively. The Federal Reserve has maintained the current rate of 5.50% for several months to control inflation. But, with the economy showing mixed signals, the situation could change rapidly.”

“On the other hand, it’s important to note that a too large cut could send mixed signals to the markets. While inflation has decreased, uncertainties about global economic stability remain. The Fed’s decisions will affect the U.S. economy and international markets, adding another layer of complexity to the current economic outlook,” Giacomo added.

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