Three Democratic Senators Urge The Federal Reserve To Cut Rates At Its Meeting This Week

The Federal Reserve should cut interest rates this week for the first time since the onset of the COVID-19 pandemic, three Democratic senators said Monday in a letter to its chairman, Jerome Powell.

“The Fed’s monetary policy is not helping to reduce inflation. Indeed, it is driving up housing and auto insurance costs — two of the key drivers of inflation — threatening the health of the economy and risking a recession that could push thousands of American workers out of their jobs,” wrote Sens. Elizabeth Warren (D-Mass.), Jacky Rosen (D-Nev.) and John Hickenlooper (D-Colo.) in the letter sent to the Fed on Monday and obtained by HuffPost.

“You have kept interest rates too high for too long: it is time to cut rates,” the trio said.

The Federal Open Market Committee, the panel of Fed governors and regional bank presidents that sets monetary policy for the world’s most powerful central bank, is slated to meet Tuesday and Wednesday to discuss whether to move rates.

Economists don’t expect the FOMC to change rates, though the post-meeting statement and Powell’s press conference will be closely examined for clues about when it may do so. In a survey of 116 economists by financial wire service Reuters, 74 said they did not expect a cut until September. That survey was taken before Friday’s May jobs report, which showed a bigger-than-expected gain of 272,000 in payrolls, a sign of economic strength that could delay a rate cut even further.

The Fed has not cut its key federal funds rate since March 2020, when it slashed it by a huge 100 basis points as the COVID-19 pandemic began dragging down the U.S. and global economies.

Warren, Rosen and Hickenlooper said waiting to cut would be a mistake, citing actions by other central banks and the potential role high interest rates may be playing in some inflation-sensitive sectors, like insurance.

The three said other major central banks are leaning toward or have already cut rates recently, citing the European Central Bank as well as others in Canada, Sweden and Switzerland.

“The Fed’s decision to keep interest rates high continues to widen the rate gap between Europe and the U.S, as the lower interest rates could push the dollar higher, tightening financial conditions,” they said.

In addition to more predictable effects like keeping mortgage and rental prices high, the current rates may also be playing a part in higher insurance costs, which have come to the fore as an inflation driver in this economic cycle.

“The increase in the cost of motor vehicle insurance reflects factors including a shortage of mechanics, more severe and frequent car accidents, climate change leading to more vehicles damaged by extreme weather, and more complex cars that are more expensive to repair. None of these factors are mitigated by high interest rates,” the senators wrote.

Furthermore, insurance companies make investments with premium proceeds, and some may have been caught flat-footed when the Fed began raising rates sharply in 2022 to head off inflation, losing money on invested premiums.

“In fact, the Fed’s rapid increase in interest rates in 2022 may have had the opposite of its desired effect, prompting insurers to raise premiums,” the senators wrote.