• Former White House economic adviser Kevin Hassett warned that raising interest rates would be a policy error given current economic conditions.
  • His comments come as the Federal Reserve deliberates its next move on monetary policy, with markets split on whether to hike or hold.
  • Critics argue that inflation remains stubborn, while supporters of Hassett's view point to slowing growth and labor market softness.

Hassett's Warning

Kevin Hassett, who served as chairman of the Council of Economic Advisers under President Donald Trump, said in an interview on Thursday that increasing borrowing costs now would be "a mistake." He argued that the economy is showing signs of cooling, and further tightening could tip it into recession. "We've seen a softening in consumer spending and a slowdown in hiring," Hassett noted. "Raising rates now would be like throwing cold water on a fire that's already dying down."

The Federal Reserve has raised its benchmark rate by over 5 percentage points since early 2022 to combat high inflation. However, recent data shows inflation easing but still above the central bank's 2% target, while GDP growth slowed to 1.6% in the first quarter.

Market Reaction

Treasury yields fell on the comments, with the 10-year note dropping 4 basis points to 4.38%. Futures markets now price in a 40% chance of a rate cut by September, up from 30% last week. "Investors are parsing every hint from policymakers and former officials," said a fixed-income strategist at a major bank. "Hassett's view carries weight because of his tenure and his alignment with fiscal conservatives who want lower rates."

Economists remain divided. Some argue that inflation risks persist, citing sticky services prices and rising wages. Others agree with Hassett, pointing to manufacturing contraction and reduced consumer confidence.

Political Implications

Hassett's remarks also underscore the political pressure on the Fed during an election year. The White House has avoided directly commenting on monetary policy, but President Biden has emphasized his commitment to independent Fed decisions. Some Republicans have called for rate cuts to boost growth, a stance Hassett echoes. "Central bankers should focus on their dual mandate, but they also need to be aware of the real-world consequences of their actions," he said.

The Fed's next decision is on June 12. Governor Christopher Waller said earlier this week that he needs "several more months" of data before supporting a cut.

Updates

This article was updated to include market data as of 2:30 PM ET. Attempts to reach the Federal Reserve for comment were unsuccessful.