Is it Possible for the FED to Cut Interest Rates by More than 25 Basis Points?

The Director of the White House National Economic Council, Kevin Hassett, stated that he sees significant opportunities for a substantial reduction in the Federal Reserve’s key interest rate.

According to a Bloomberg report, Hassett is Donald Trump’s leading candidate for the next Fed chair. At the Wall Street Journal CEO Council meeting on Tuesday, he was asked whether he would support significantly lower rates, as the president desires, if appointed to the position.

“If the data show that we can do it, I think there is currently enough room for that,” Hassett said. When asked if this means a cut of more than 25 basis points, he replied, “exactly.”

His close ties to Trump have sparked debate over whether Hassett would maintain the Federal Reserve’s decades-long tradition of political independence in interest rate decisions if he were chosen as chair. Trump himself told Politico on Tuesday that rapid rate cuts would be a “loyalty test” in his selection of the Fed leader.

Political Question

When asked whether his loyalty, if he headed the Fed, would be to Trump or to his independent economic judgment, Hassett said he would be guided “by my own judgment, which I think the president trusts.”

These comments followed his statement on Monday, when he called it “irresponsible” to pre-announce a plan for interest rates for the next six months. “The job of the Fed chair is to watch the data and adjust, explaining why you take certain actions. To say, ‘I will do this over the next six months,’ would be really irresponsible,” Hassett said in a CNBC interview.

On Tuesday, he again criticized the Fed for some of its policies over the past years, accusing the central bank of political behavior.

Relationship with Powell

“The most important task of the Fed chair is to monitor economic data and act independently of politics,” Hassett said.

At the same time, he emphasized that he has a “very strong” relationship with the current Fed chair, Jerome Powell, whose term ends in May. Hassett noted that he meets with Powell almost regularly in his current role, after having monthly meetings when he was chair of the Council of Economic Advisers during Trump’s first term.

It is expected that Trump’s chosen Fed leader will take the seat on the board currently held by Stephen Miran, who is on leave as CEA chair. If the nominee assumes the position in January, there will be several months during which he will work under Powell as the outgoing chair.

Artificial Intelligence and Economic Policy

On Tuesday, Hassett again emphasized that the rise of artificial intelligence provides an opportunity for the Fed to formulate policy similar to actions taken by former chair Alan Greenspan in the 1990s. He noted that the expected gains from increased productivity could counteract inflation, which is why Greenspan did not push for higher rates despite low unemployment.

“Right now, AI is a more significant factor for productivity than the computer, and this is the moment for the Fed to act in a Greenspan-like manner,” Hassett said. He added that with the expected productivity growth and capital investments, potential GDP growth could exceed 3%, even 4%.

“There is a lot of room for actions like rate cuts, which would increase both aggregate supply and aggregate demand,” Hassett said.

Source: Bloomberg Terminal