A pair of senators urged the Federal Reserve to not take their foot off the gas with respect to reducing the federal funds rate ahead of the November meeting of the Federal Open Market Committee (FOMC), citing the progress in lowering the national inflation rate.
The Fed ultimately determined it appropriate to lower the target rate by 25 basis points instead, signaling a more cautious approach in light of lingering uncertainty about the economy.
Sens. Elizabeth Warren (D-Mass.) and John Hickenlooper (D-Colo.) asserted another 50 basis point-cut, as the Fed greenlit in September, would be timely and beneficial to employment and housing affordability.
“Borrowing costs, and in turn housing costs, are still too high. As we tackle the housing affordability crisis across the United States, it is critical that we build more housing,” the senators wrote. “Lowering interest rates is key to unlocking more supply: rate cuts will lower of the cost of capital, helping to tackle inflation by spurring more housing construction and consequently lowering housing prices. However, the Fed’s high interest rates have suppressed housing construction for years; the gap between multifamily starts (projects that builders have begun construction on) and (housing construction) authorizations is now more than double the level of the prior 20-year average, indicating that the cost of capital remains a significant barrier to housing development.”
The senators also noted how elevated interest rates have made many homeowners reluctant to sell their homes because of the “lock-in effect” – which refers to a situation in which homeowners locked in a lower rate than is presently available in the marketplace and do not want to give it up due to cost concerns. The lawmakers also expressed concern that the Fed may elect not to lower rates again this year, despite previously indicating more cuts were on the way.
“Mortgage interest rates have increased by more than five percentage points since reaching a low of 2.65 percent in January 2021, peaking at 7.79 percent in October 2023,” the senators wrote. “Since then, rates have trended down to 6.08 percent in September 2024 but have subsequently rebounded to 6.54 percent. This recent, slight increase is likely because investors expect the Fed to now hold rates steady for the rest of the year, rather than continuing to cut. If the Fed moves forward with more rate cuts, housing prices and mortgage rates would thus also likely drop, allowing more families to achieve the American dream.”
The 50 basis point-cut in September was the first by the Fed since 2020. Since then, economic data indicates inflation has dropped to 2.1 percent, the lowest level since February 2021.
New statistics from the Department of Labor indicate that unemployment claims fell while the number of Americans collecting unemployment benefits rose in recent months, suggesting unemployed people are having a more difficult time landing jobs than before, the senators said, concluding that demand for workers could be waning.
With these considerations in mind, the senators argued there is no need for restrictive interest rate policies.