The reason a level squish could be needed is because new players look at the max level for the game they are playing and see that they need to climb over 100 levels and eventually it looks to steep so they just quit. This is already a problem because of the amount of story to get through and having the level cap give this impression of being too steep as well is not going to help.

I don't think they can just reduce it to, say, 50. You have to consider the problems with reducing it too low. When you start the game, you need to feel that gaining levels is easy, so the first 10 levels you can just kill enemies otherwise it gives the impression that gaining experience is too hard. ARR is extremely long with so many dungeons packed together, so 10 levels wouldn't cut it, but 20 probably would. The new jobs we got in Heavensward start at 30 and you unlock all your starter jobs at 30, so 30 would make the perfect level cap for ARR. Job quests could be rescaled to appear every 2 or 3 levels like in the expansions. This would put Heavensward's cap at 40, Stormblood's at 50, Shadowbringers' at 60 and Endwalker at 70.

The biggest problem would be gear, which would have to be squished to be the same level as other gear and stop being relevant, but we already have a lot of gear that isn't relevant (such as using item level 340 or 370 when 400 is the cap at level 70) and dungeon gear has never been relevant to people who get gear from anywhere else than dungeons, except from leveling dungeons.

Item level could be squished as well. Every piece of gear jumps by 5 when it could just jump by 1. Between level caps it jumps by 3. The result of such huge jumps is that we are on course to get over item level 1000.

The alternative could be to start the new expansion from a low level but players that aren't new would have to sync down and use ARR rotations and feel no level progression.

I remember Yoshi-P mentioning horizontal progression so I think he is thinking about this issue but it's not an easy thing to change because it could have consequences for the way the game currently works.