The path to prolonged easing: why the discussion of interest rate cuts by the American Federal Reserve in 2025

WASHINGTON - In March 2025, the official stance of the Treasury, led by an influential advisor, gained new weight in the monetary policy debates. The recommendation to further cut the Federal Reserve’s interest rate comes amid mixed economic signals, prompting the central bank to carefully consider the costs of banking gold and other operational expenses in the financial sector.

The economic landscape of the first half of 2025 is characterized by ambiguity: inflation rates are slowly approaching the target level, but signs of slowing employment and production are also observed. This creates a scenario where easing monetary policy seems like a logical step, albeit with certain reservations.

Context of the recommendation: why central banks discuss easing

The position of the senior Treasury advisor Lavorgna, who was given a platform in Walter Bloomberg, reveals a broad consensus among policymakers on the need to adjust interest rates. However, this consensus is far from universal — lively debates surround the issue of monetary easing.

The thing is, real economic data play their games. The ISM index in the manufacturing sector has fallen below the expansion threshold and remains there for several months. This signal leads experts to suspect that economic slowdown could become more significant than previously assumed.

Meanwhile, most central banks of developed economies have already made their choice — they have shifted into easing mode. The European Central Bank, Bank of England, and others have adopted a softer stance. This creates a sensitive context for the Federal Reserve, as delays in easing could lead to misalignments in exchange rates and capital flows.

Additionally, the value of banking gold and other reserve assets of central banks are gaining new significance in light of discussions about easing. Lowering the interest rate affects the yield on central bank assets, including gold, which traditionally serves as a stability cushion. This aspect is often overlooked but is critical to understanding why central banks choose a cautious approach.

What the data say: overall inflation but with nuances

Inflation indicators for January–February 2025 send mixed signals. Core PCE inflation is close to the Federal Reserve’s 2% target range, but overall inflation remains slightly higher due to volatility in energy prices.

Key macroeconomic indicators trend table:

These figures explain the Treasury advisor’s position. Inflation is under control, but growth is slowing. In such a situation, rate easing is considered a preventive measure to avoid recession.

Transmission mechanisms: from rates to assets and back

When the Federal Reserve lowers the interest rate, it’s not just a number on paper. The rate cuts propagate through the economy via several channels:

Bank lending channel. Lower rates make borrowing cheaper, encouraging businesses and households to take more loans. However, in recent years, this channel has been working more slowly due to banks adhering to stricter lending standards.

Asset price channel. Lowering the interest rate makes stocks and real estate more attractive, as the discount rate used to evaluate future cash flows decreases. This is typically observed in stock markets within days of easing announcements.

Currency channel. Lower US rates push foreign investors toward alternative assets, weakening the dollar. This makes US exports cheaper for foreign buyers.

Expectations. Central bank communication about easing influences people’s expectations regarding future inflation, employment, and growth. If people believe policy will be accommodative, they behave differently.

However, currently, one channel is underperforming — the banking channel. The reason lies in the cost of banking gold and other reserve requirements, which have been increased due to regulatory changes after 2008. Banks are required to hold more capital, limiting their ability to expand lending even at low rates.

Historical lessons: 1995-1996 and 2019

To understand the current situation, it’s useful to look at previous easing episodes.

In 1995-1996, the Fed cut interest rates by 300 basis points, preventing an economic slowdown when inflation was still moderate and unemployment was low. This maneuver is considered successful — recession was avoided, and the economy continued to grow.

Similarly, in 2019, despite low inflation and low unemployment, the Fed lowered rates by 75 basis points. The goal was to prevent a potential downturn caused by trade tensions and global slowdown. Although this move was later criticized for overreacting, especially considering the subsequent pandemic, it demonstrates the central bank’s readiness for preemptive action.

The current situation bears similarities. The central bank is considering warnings of a potential slowdown rather than reacting to an already initiated recession. This should inform the easing discussion.

Risks and cautions: what skeptics fear

Not all economists support the Treasury advisor’s recommendation for monetary easing. They raise several concerns:

Inflation risk. Excessive easing could destabilize inflation expectations, which are currently anchored.

Financial stability issues. Too low rates may provoke asset bubbles, especially in high-risk markets.

Global complications. Easing by the Fed weakens the dollar, potentially creating problems for other countries with dollar-denominated debt.

Uncertainty about structural changes. Some economists argue that growth slowdown may be structural rather than cyclical, and easing may not help.

These arguments should be considered thoughtfully in decision-making.

Financial markets await signals

Investors and traders are actively positioning themselves for reactions to possible rate easing. The US bond yield curve is in a state of uncertainty — short-term rates are declining more significantly than long-term ones.

If easing is announced, expected effects include:

• The yield curve (short-term rates will fall more sharply than long-term rates)
• Rotation into rate-sensitive stocks (financial tech, consumer goods)
• Dollar depreciation against euro and British pound
• Narrowing of credit spreads, making borrowing cheaper for corporations

Conclusion: balancing on a razor’s edge

The Treasury advisor’s recommendation for easing the Federal Reserve’s policy reflects a complex balancing act between supporting economic growth and preventing destabilization. The central bank must consider not only visible indicators like inflation and unemployment but also hidden costs, including the value of banking gold and reserve assets, which influence the resilience of the financial system.

In 2025, the Federal Reserve faces one of its most challenging decisions. It must weigh easing in response to slowdown signals against maintaining a firm stance to protect against inflation risks. The decision will have far-reaching consequences not only for the US economy but also for global financial markets.

Frequently Asked Questions

Question 1: Who is Lavorgna and why does his opinion matter?
Lavorgna is a senior US Treasury economic advisor. His position provides access to the latest economic data and influence on the official stance of the administration. Therefore, his statements on rate easing are seen as signals of the US government’s official position.

Question 2: Does rate easing guarantee economic growth?
No. Easing creates conditions conducive to growth but does not guarantee it. If slowdown is structural rather than cyclical, easing may have limited effectiveness.

Question 3: How does easing affect the value of banking gold?
Lower rates may increase gold demand as an inflation hedge, but simultaneously reduce interest expenses for banks holding gold in reserves.

Question 4: How long will easing last?
Duration depends on economic conditions. If inflation remains under control and unemployment begins to stabilize, easing could last several quarters.

Question 5: Which markets are most sensitive to rate easing?
Tech stocks, real estate markets, and emerging markets are most sensitive to changes in interest rates.