WASHINGTON — Federal Reserve officials agreed at their September meeting to cut interest rates, but were unsure how aggressively to do so. Ultimately, they decided on a half-percentage point move in an effort to balance confidence in inflation with concerns about the labor market, according to the minutes released Wednesday. .
The summary of the meeting The detailed reasons why policymakers decided to approve a 50 basis point cut in the jumbo rate for the first time in more than four years showed members were divided over the economic outlook.
Some officials hoped for a smaller cut of a quarter of a percentage point, as they sought assurance that inflation would be sustainably lower and were less concerned about the jobs picture.
Ultimately, only one member of the Federal Open Market Committee, Governor Michelle Bowman, voted against the half-point cut, saying she would have preferred a quarter point. But the minutes showed that others were also in favor of a smaller move. It was the first time since 2005 that a governor disagreed with an interest rate decision for a Fed known for its monetary policy unity.
“Some participants noted at this meeting that they would have preferred a 25 basis point reduction in the target range, and a few others indicated that they could have supported such a decision,” the minutes said.
“Several participants noted that a 25 basis point cut would be in line with a gradual path of policy normalization that would give policymakers time to assess the degree of policy restriction as the economy developed,” the document added. “A few participants also added that a 25 basis point move could indicate a more predictable path of policy normalization.”
Markets moved little after the release, with the major averages remaining on track for big gains.
Since the meeting, economic indicators have shown that the labor market may be stronger than officials who favored the 50 basis point move expected.
In September, nonfarm payrolls rose by 254,000, much more than expected, while the unemployment rate fell to 4.1%.
The data has helped reinforce expectations that while the Fed is likely still in the early days of an easing cycle, future cuts are unlikely to be as aggressive as September’s measure. Chairman Jerome Powell and other Fed officials in recent days have backed expected cuts of 50 basis points by the end of 2024, as indicated in the unofficial “dot plot” forecast released after the September meeting.
The minutes noted that the vote to approve the 50 basis point cut came “in light of progress on inflation and the balance of risks” that was against the labor market. The minutes noted that “a substantial majority of participants” favored a bigger move, without specifying how many opposed it. The term “participants” suggests involvement of the entire FOMC and not just the twelve constituents.
The minutes also noted that some members at the July meeting favored a reduction, which never materialized.
While the document was more detailed about the debate over whether to approve the 25 basis point cut, there wasn’t as much information about why voters supported the bigger move.
At his press conference after the meeting, Powell used the term “recalibration” to summarize the decision to cut spending, and the term also appears in the minutes.
“Participants emphasized that it was important to communicate that the policy stance recalibration at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be faster than participants’ estimates. from the right path,” the minutes say.
Such a recalibration would bring policy “better in line with recent inflation and labor market indicators.” Supporters of the 50 basis point cut “also emphasized that such a move would help maintain the strength of the economy and the labor market while continuing to promote progress on inflation and reflect the balance of risks.”
Under normal circumstances, the Fed prefers to cut rates by quarter points. Previously, the central bank fell only half a point during Covid and, before that, during the 2008 financial crisis.
Market prices indicate that the Fed Funds rate will be between 3.25% and 3.5% at the end of 2025, roughly in line with the average projection of a 3.4% rate, according to CME Group’s FedWatch. Futures markets previously indicated a more aggressive path and are now actually pricing in about a 1 in 5 chance that the Fed won’t cut at its November 6-7 meeting.
However, the bond market has behaved differently. Since the Fed meeting, yields on both the 10- and 2-year Treasury notes have risen by about 40 basis points.