Fed Divided on 50-Basis Point Cut — Evening Brief – 10.09.24
A “substantial majority” of Federal Reserve policymakers supported the central bank’s 50-basis point interest rate reduction in September; however, the minutes from the Federal Reserve’s September 17-18 meeting indicated that some members favored initiating the rate-cutting cycle with a more conservative 25-basis point reduction due to concerns regarding the economy’s strength.
“A gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved,” the minutes said. “A few participants also added that a 25-basis point move could signal a more predictable path of policy normalization.”
Some FOMC members observed that uncertainties regarding the longer-term neutral interest rate complicated the evaluation of policy restrictiveness and, in their opinion, warranted a gradual reduction of policy restraint.
Only one member, Michelle Bowman, dissented from the 50-basis point cut.
Almost all FOMC members expressed increased confidence that inflation was progressing sustainably towards 2%, and “almost all participants judged that the risks to achieving the committee’s employment and inflation goals were roughly in balance,” the minutes showed.
Almost all Federal Reserve officials reported that the risks of inflation rising had lessened, while most saw a rise in the risks of employment declining.
The participants also said that if the data came in as expected — with inflation moving toward 2% and the economy near maximum employment — “it would likely be appropriate to move toward a more neutral stance of policy over time.”
They aimed to clarify that the recalibration of policy should not be construed as an indication of a deteriorating economic outlook or as a warning that the rate of policy easing “would be more rapid than participants’ assessments of the appropriate path.”
However, numerous developments have occurred after the September meeting. Data indicating a more robust job market than anticipated has unsettled expectations for additional substantial interest rate reductions, leading some to speculate if the central bank would halt its easing cycle.
“The market is now pricing fewer rate cuts than the Fed’s projections, which is a significant shift from just a few weeks ago,” UBS strategists said in a Tuesday note.
Nevertheless, some Federal Reserve members continued to advocate for additional interest rate reductions in the wake of the robust September employment report, viewing the labor market’s resilience as an indication that the economy is continuing to progress toward a soft landing.
“Right now, I think monetary policy is well positioned for the outlook, and if you look at the SEP projections that capture the totality of the views, it’s a very good base case with an economy that’s continuing to grow and inflation coming back to 2%.” New York Fed President John Williams said on Tuesday.
“The risk that further easing of financial conditions could boost spending and push demand to exceed supply suggests that the Federal Open Market Committee shouldn’t rush to cut the federal funds target rate to a “normal” or “neutral” level, Dallas Fed President Lorie Logan, added in a speech on Wednesday.
“Another reason to move slowly pertains to the uncertainty of exactly where the neutral rate — the point at which the fed funds rate neither boosts nor hinders the economy — stands,” Logan said.