WASHINGTON – Federal Reserve officials agreed to cut interest rates at their September meeting, but were unsure how much, and ultimately decided to cut interest rates by 0.5 percentage points to balance inflation confidence and labor market concerns, minutes of the meeting released on Wednesday showed.
A summary of the meeting detailed why policymakers decided to approve the first major 50 basis point rate cut in more than four years and showed members were divided over the economic outlook.
Some officials want a smaller drop of a quarter of a percentage point as they seek reassurance that inflation remains low and are less concerned about employment.
In the end, only one FOMC member, Gov. Michelle Bowman, voted against a half-percentage point cut, saying she would have preferred a quarter-percentage point cut. But minutes showed others also favored smaller measures. This is the first time since 2005 that a governor has opposed an interest rate vote by the Fed, which is known for its unifying monetary policy.
“Some participants said they wanted to lower the target range by 25 basis points at this meeting, while others said they would have supported such a decision,” the meeting minutes said.
“Some participants noted that a quarter-point rate cut would be consistent with a gradual path to policy normalization, which would give policymakers time to assess the degree of policy restraint as the economy develops,” the document added. “Some participants also added said a 25 basis point move could signal a more predictable path to policy normalization.”
Since the meeting, economic indicators have suggested the labor market may be stronger than expected by officials who support a 50 basis point rate hike.
Nonfarm employment increased by 254,000 in September, far exceeding expectations, and the unemployment rate fell to 4.1%.
The data helped solidify expectations that while the Fed may be in the early stages of an easing cycle, future rate cuts may not be as aggressive as they were in September. Chair Jerome Powell In recent days, the Fed and other officials have backed a 50-basis-point rate cut expected in an unofficial “dot plot” forecast released after the September meeting.
The minutes of the meeting pointed out that the vote to approve the 50 basis points cut in interest rates was “taking into account the progress of inflation and the balance of labor market risks.” Minutes of the meeting noted that “the vast majority of participants” were in favor of larger measures, but did not specify how many opposed it. The term “participants” implies the participation of all FOMC personnel, not just the 12 voters.
The minutes also noted that some members favored budget cuts at the July meeting, but the proposal never materialized.
While the document discusses the debate over whether to approve a quarter-point rate cut in more detail, there isn’t much information on why voters would support a larger rate cut.
At the post-meeting press conference, Powell used the word “recalibration” to summarize the decision to cut interest rates, a word that also appeared in the minutes of the meeting.
“Participants emphasized that it is important to convey that the recalibration of the policy stance at this meeting should not be interpreted as evidence of a poor economic outlook or a signal that the pace of policy easing will be faster than participants assessed the appropriate path. ,” the minutes of the meeting stated.
Such a recalibration would bring policy “better consistent with recent inflation and labor market indicators.” Supporters of a 50 basis point rate cut “also emphasized that the move would help maintain the strength of the economy and labor market while continuing to make progress on inflation and would reflect the balance of risks.”
Under normal circumstances, the Fed would prefer to cut interest rates by a quarter of a percentage point. Previously, the central bank had only adjusted half a percentage point during the COVID-19 pandemic and earlier during the 2008 financial crisis.
According to CME Group’s FedWatch, the market is pricing in a federal funds rate range of 3.25%-3.5% by the end of 2025, roughly in line with the median rate forecast of 3.4%. Futures markets have previously been pointing to a more aggressive path, and in fact there is now about a one-in-five chance that the Fed will not cut interest rates at its Nov. 6-7 meeting.
However, the bond market behaved differently. Since the Fed meeting, 10-year and 2-year Treasury yields have both surged about 40 basis points.
