In a letter to Federal Reserve Chair Jerome Powell, Sens. Elizabeth Warren, D-Mass., and John Hickenlooper, D-Colo., urged the Federal Open Market Committee to reduce its policy rate by half a percentage point during its meeting on Thursday. 

Warren and Hickenlooper praised the FOMC's September decision to reduce the target range of the federal funds rate by 50 basis points — double the typical 25 basis point policy movement interval — as a "good first step," but noted that additional steep cuts would be necessary to deliver "much-needed relief from high borrowing costs to American families."

The senators say recent economic data show that price growth has largely stabilized while recent employment trends indicate a potential softening in the labor market. 

"Given the Fed's confidence in inflation moving towards its target of 2%, now is the time to lift its restrictive policies and proceed with additional rate cuts," Warren and Hickenlooper wrote. 

In the letter, the senators reference the headline personal consumption expenditures, or PCE, index in September, which showed overall prices increasing 2.1% year over year. The Fed's preferred measure of inflation is core PCE, which factors out commodity-based price categories such as food and energy. Core PCE came in at 2.7%, the same as it was in August.

Fed officials have shared mixed interpretations about recent inflation trends. Some have been encouraged by the downward trajectory of inflation and the measure's proximity to the central bank's 2% target. Fed Gov. Michelle Bowman, the lone dissenting vote against the September cut, characterized the figure as "uncomfortably" high during a speech shortly after the last FOMC meeting.

With the effective federal funds rate at 4.83%, Warren and Hickenlooper said the Fed's policy rate remains "restrictive," meaning it encourages companies and consumers to save their funds rather than spend or borrow. Typically, interest rates are viewed as restrictive when they are meaningfully above the rate of inflation. 

To get rates into neutral territory, the senators argued, the Fed must lower its target range by more than 1.25 percentage points and should do so quickly. They noted that elevated borrowing costs have not only made it harder for consumers to finance home purchases, but they have also restricted the development of new housing supply.

"If the Fed moves forward with more rate cuts, housing prices and mortgage rates would thus also likely drop, allowing more families to achieve the American dream," they wrote.

The federal funds rate directly impacts short-term interest rates. Typically, 30-year mortgages are more closely correlated to long-term instruments, such as 10-year Treasury bills, which are influenced by factors such as employment, overall economic growth and long-term monetary policy expectations.

After lowering its benchmark interest rate in September, the FOMC indicated that more cuts would be coming this year and throughout 2025, though officials have been noncommittal about the pace of those cuts. 

The vast majority of market participants are expecting the Fed to lower its policy rate by 25 basis points, according to CME group's Fedwatch tool. Based on 30-day Fed funds rate futures prices, more than 99% of traders are underwriting a single rate cut, with the rest expecting the FOMC to hold the target range steady between 4.75% and 5%.