Federal Reserve Rates Are Too High, Says Former World Bank Chief

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Rates should be between 0.25 and 1.75 percent rather than the current range of 4.25 to 4.5 percent, according to Trump.

Former World Bank President David Malpass criticized the U.S. Federal Reserve for keeping its benchmark interest rate elevated, during a July 2 interview with CNBC.

The Fed began raising rates from near zero in 2022 in a bid to rein in inflation. They peaked at 5.5 percent in 2023. The central bank then cut rates multiple times last year, bringing them down to a range of 4.25 to 4.5 percent.

Last month, the Fed left rates unchanged for the fourth straight meeting.

โ€œThe Fed has the rates too high. And the question is when are they going to cut and find an exit strategy from what theyโ€™re doing,โ€ Malpass said. โ€œThe Feds have created all these problems, these cycles of inflation and deflation. And I think there has to be a full remaking of their models. Trumpโ€™s trying to do that but itโ€™s going to take time.โ€

In its June meeting, the Fed signaled that two rate cuts may be on schedule in 2025, with interest rates expected to finish the year at 3.9 percent. The Fed is looking at bringing down inflation to the 2 percent level and is waiting to see the impacts of tariff policies instituted by the Trump administration.

The Personal Consumption Expenditures (PCE) annual inflation rate, the Fedโ€™s preferred gauge of inflation, was 2.3 percent in May.

After the June Fed meeting, Federal Reserve Chairman Jerome Powell said on June 18 that while inflation has eased from the high levels seen in 2022, it remains โ€œsomewhat elevated relative to our 2 percent longer-run goal.โ€

He said that the effects of tariffs on inflation could take some time to be visible as it makes its way through the distribution chain โ€œto the end consumer.โ€

โ€œFor the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,โ€ Powell said.

In his interview, Malpass contrasted the U.S. and European economies and their interest rates.

In Europe, economic growth is very slow, he said, adding the situation was โ€œpractically a recession all the time.โ€ The central bank in Europe sees this as a good thing as they do not want to overheat the economy, Malpass said.

If the U.S. economy is run in the same way, โ€œthatโ€™s really bad for the forgotten man,โ€ he said. โ€œTrump ran on the idea that there’d be higher median wages and especially manufacturing jobs and you canโ€™t do that with the rates where they are.โ€

The rates are โ€œtoo high for that because commercial and the actual working capital loans that are needed for small business and for manufacturing arenโ€™t there. The banks arenโ€™t doing it because all they want to do is lend to the government,โ€ Malpass said.

By Naveen Athrappully

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