Strategists questioned the Treasury Secretary’s recent comments asserting that Federal Reserve policy overshoots models by more than a percentage point.
Treasury Secretary Scott Bessent’s view that the Federal Reserve’s interest rate is more than a percentage point above levels indicated by models is wrong, Deutsche Bank interest-rate strategists said.
Bessent said on Aug. 13 that “any model” suggests that the Fed’s policy rate “should probably be 150, 175 basis points lower. Since then, a search for applicable models has come up empty, with Deutsche Bank strategists led by Matthew Raskin being the latest to join the effort.
The rules in the Fed’s semiannual monetary policy report still “don’t obviously call for a cut, let alone 150-175bp of reductions,” Raskin, a former Fed economist and adviser, and his group wrote in a report Tuesday.
“The main point to note is that the current funds rate falls squarely within the relatively narrow range of rule prescriptions” which spans about 4% to 4.65%, they wrote, indicating that a quarter-point rate cut “could be warranted.”
The Fed’s target range for the federal funds rate has been 4.25%-4.5% since December following a percentage point of reductions. While policymakers historically have cut rates earlier than indicated by the rules during periods of downside risks to the labor market, they have so far fended off relentless pressure by President Donald Trump’s administration to cut rates further.
The Treasury Department didn’t immediately respond to a request for comment on the Deutsche Bank report.
Powell has said Fed’s inaction is warranted by forecasts that administration trade policies will put upward pressure on inflation. However emergent signs of labor market weakness in the latest monthly data prompted financial markets to wager on at least two quarter-point cuts by year-end. Two Fed governors also broke with Powell at the July policy meeting, dissenting in favor of cutting rates.
The Deutsche Bank strategists evaluated the federal funds target in relation to a set of rules whose inputs include the annual rate of core inflation as measure by the price index for personal consumption expenditures and the unemployment rate, among others.
The analysis didn’t include the so-called “first-difference rule, which with inflation still above target and the unemployment rate broadly unchanged over the past year” suggests the Fed should raise rates, the report said.