Should the fed (Federal Reserve System) cut interest rates as markets
signal?
Milan, Aerts, 20240940, Handelsingenieur/ Commercial engineer (1e bachelor), 2024-2025
Source: “Bessent Says Markets Think Fed Should Cut Rates”, The Wall Street Journal, May 1st
2025
In a recent interview with Fox Business, U.S. Treasury Secretary, Scott Bessent stated that the
market is giving strong signals that the Federal Reserve should lower its interest rates. One
such signal is the drop in the two-year US government bond yield, which is currently below
the federal funds rate. This is an important indication to slower economic growth or even a
possible recession. What is clear is that this observation has a lot of implications for
monetary policy and the investors themselves. (Timiraos, 2025) (De Ceuster, 2024)
In my opinion, the Fed should indeed seriously consider cutting its policy rate. However, this
decision should not be made too hastily, but should only be made when sufficient data
indeed shows that this is the right decision to make. The last thing concerned investors are
waiting for are rash decisions that will only create even more turmoil in the economic
landscape. After all, the main goal should be to restore stability and confidence.
There are a couple of reasons why I’m convinced that the Fed should lower the interest rates.
One effect of lowering interest rates would be to discourage saving. This is because savers
would receive less interest on their balances which would make them more likely to spend
more money or invest in riskier assets (e.g. stocks or real estate). Thus, this reduction in
interest rates would greatly increase demand in the economy which in turn stimulates
economic growth. However, it is important not to consider only the domestic economy.
Another automatic consequence of the potential interest rate cut is a depreciation of the
local currency, the U.S. dollar in this case. This is because it becomes much less interesting
for other countries to then invest in this currency. This is especially good news for export
orientated companies. Foreign customer can buy their products at lower prices, making their
business more competitive on the world market. This extra income allows exporters to invest
more and, as a result, grow. The big downside of the currency’s decline lies with the opposite
story, imports. These imports become significantly more expensive and can lead to inflation,
bankruptcies in companies that depend on imports and declining purchasing power with
respect to foreign products. The U.S.A. is primarily focused on importing so will experience
the negative effects the strongest. Although, it is important to note that current president
Trump wants to reverse that narrative. (McGeever, 2025),
What’s clear is that at this point it is a very difficult issue for the Fed to act correctly at this
time. Whatever they decide, there will always be winners and losers. Even though the people
have felt for months that there should be an interest rate cut there are a lot of critics who
warn that a rate cut will rekindle inflation. Even though I understand that it is a very difficult
topic, I’m convinced that it is crucial to make the right decision now. At this time the Fed
should quickly take the bull by the horns and introduce an interest rate cut. After all, right
now inflation expectations are well within the Fed’s targets. Furthermore, at this time it is
much more important to avoid an economic downturn than to fear a possible rise in
inflation. Often we can predict the future by looking at the past, and I think that we should
do the same at this crucial point. Twice in the past, central banks have intervened too late
when it came to whether or not cut the interest rates. Both, during the Great Depression and
during the credit crunch in 2008, the banks intervened too late after signals of economic
weakening so that greater damage could not be avoided. (Yglesias, 2015)
A lot of negative things are often said about President Trump, especially here in the West.
And even though I also often disagree with him, I do follow his views in this dilemma. Trump
indicated both in the first and now in his second term that interest rates should be lowered. I
find this noteworthy because the idea of lowering interest rates is often seen as weak. A
critical eye does compel me to say that Trump may be doing this to gain popularity. He
realizes that the common people want interest rates down and he himself has no influence
over the Fed’s monetary policy. As a result, if later turns out that the Fed acted wrong or too
late, he can shift all the blame onto this institution and has made himself popular with his
vision. (Cox, 2025) (Rushe, 2019)
My final conclusion is clear. Twice in history of the U.S. economy, the Fed acted too late
despite clear signals that interest rates needed to go down. Twice their late action led to a
major financial crisis. It is time to do things differently now and to lower the interest rates as
several experts including Bessent indicate.
Reference list
Cox, J. (2025, January 23). Trump says he'll ‘demand that interest rates drop immediately'. White
House, Washington, United States of America.
De Ceuster, M. (2024). The Financial System: Role of the Government [Class Handout]. Antwerp:
University of Antwerp, Introduction to Financial Markets.
McGeever, J. (2025, May 2). After record import blow to U.S. GDP, beware export sucker punch.
Retrieved from Reuters: https://www.reuters.com/markets/us/after-record-import-blowus-gdp-beware-export-sucker-punch-mcgeever-2025-05-01/
Rushe, D. (2019, May 1). Federal Reserve snubs Trump by refusing to cut interest rates. Retrieved
from The Guardian: https://www.theguardian.com/business/2019/may/01/interestrates-us-latest-trump-federal-reserve-snubTimiraos, N. (2025, May 1). Bessent Says Markets Think Fed Should Cut Rates. Retrieved from
The Wall Street Journal: https://www.wsj.com/livecoverage/stock-market-today-tariffstrade-war-05-01-2025/card/bessent-says-markets-think-fed-should-cut-ratesVZ46SegoxSfuQ8r4kHi6
Yglesias, M. (2015, May 13). The Fed and the 2008 financial crisis. Retrieved from Vox:
https://www.vox.com/2014/6/20/18079946/fed-vs-crisis
Appendix