The Fed’s Rationale for Rate Cuts
The Fed’s Rationale for Rate Cuts
Heresy Financial: 9-29-2025
The Federal Reserve is currently operating under a monetary policy stance widely regarded as restrictive—a necessary measure, according to many, to fully contain inflation. But behind closed doors, a significant debate is brewing, fueled by newly appointed Fed Governor Steven Moran, who is advocating for a dramatic reversal.
Moran argues that the current policy is excessively tight because the neutral interest rate ($r^{*}$)—the theoretical rate that neither stimulates nor restrains the economy—is far lower than current Fed rates.
This clash of views isn’t just academic; it reflects deep underlying tensions in the U.S. economy, where fiscal reality is aggressively colliding with monetary theory. We break down the core arguments, as analyzed in a recent video by Heresy Financial.
Governor Moran’s recommendation to lower rates significantly is based on several key factors he believes are fundamentally shifting the economic landscape, specifically targeting inflationary pressures and national savings.
One of Moran’s most compelling (and controversial) arguments centers on rent inflation, a major component of the Consumer Price Index (CPI). He posits that changes in U.S. immigration policy have dramatically reduced population growth fueled by immigration, leading to a corresponding decrease in demand for rental housing.
If this trend continues, Moran predicts a substantial decline in rent inflation, which should naturally pull overall inflation lower. While questioning the consistency of the underlying immigration data, the macroeconomic impact is undeniable: less demand for housing means less pressure on prices, potentially giving the Fed room to ease.
In Moran’s view, these shifts mean the current high rates are unnecessarily stifling economic activity, and the Fed is risking a slowdown by sticking to its restrictive policy.
To understand Moran’s dissent, it is crucial to grasp the concept of the neutral rate. In a sound money economy, interest rates are determined by the natural supply and demand for capital, varying based on borrower risk, loan duration, and market liquidity. The neutral rate ($r^{*}$) is essentially the equilibrium point where the economy hums along without overheating or stalling.
Crucially, the Fed never truly aims to set rates at $r^{*}$.
Instead, the Fed uses monetary policy to deliberately influence the economy. When inflation is high, they set rates above the neutral rate (restrictive policy). When the economy needs a jolt, they set rates below the neutral rate (stimulative policy). Moran’s argument is simply that the Fed’s current “restrictive” setting is far too high because $r^{*}$ itself has fallen.
While Moran’s economic arguments about inflation and supply-side effects are compelling, the video from Heresy Financial emphasizes that the debate over $r^{*}$ pales in comparison to the unavoidable fiscal reality facing the United States.
The U.S. is currently burdened with over $37 trillion in national debt, pushing its debt-to-GDP ratio beyond the levels seen immediately following World War II.
This staggering debt load, financed heavily through short-term Treasury bills (T-bills), creates massive pressure for the Fed to lower interest rates—not for the health of the economy, but to reduce the government’s rapidly soaring borrowing costs.
High interest rates mean the government must pay crushing amounts simply to service its outstanding debt. Lowering rates on T-bills offers a temporary “band-aid,” providing immediate relief to the Treasury’s balance sheet.
The pressure to lower rates is therefore less about hitting the theoretical neutral rate and more about avoiding a fiscal crisis driven by unsustainable borrowing.
Ultimately, manipulating interest rates through Fed policy is only a short-term fix for a monumental structural problem. Whether Steven Moran is correct about the neutral rate being lower is secondary to the fact that the nation’s debt requires aggressive fiscal management.
Sustainable resolution cannot come from monetary easing alone. It requires genuine economic growth and increased production, generating a larger tax base and more taxable wealth to support massive government finances. Until that fiscal commitment is made, arguments over the neutral rate serve mainly as distractions from the looming debt ceiling.
For a deeper dive into the specific quantitative easing mechanisms, the implications of the debt crisis, and Governor Moran’s full analysis, watch the full video from Heresy Financial.