Some Fed Officials Were On The Fence About Its Super-Sized Rate Cut

Key Takeaways

• Officials at the Federal Reserve were divided about whether to cut its benchmark interest rate by a large or small amount in September, and ultimately decided on a large cut.
• Although only one member voted for the smaller cut, "some" of the FOMC's 12 voting members could have gone with the smaller one, according to minutes released Wednesday.
• The minutes shed light on the attitude of Fed officials who must decide whether to cut interest rates further at their next meeting in November.

It turns out that Federal Reserve policymakers were more divided about the decision to make a super-sized cut to borrowing costs in September than the committee’s final vote indicated. 

A few members of the Federal Open Market Committee would have preferred to cut the central bank’s benchmark interest rate by 0.25 percentage points rather than the 0.5 percentage-point cut the central bank went with, according to minutes of the committee’s deliberations released Wednesday. In the end, only one of the committee’s 12 members voted for the smaller cut.

“Some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision,” the minutes said. “Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved.”

The Discussion Behind the Federal Reserve's Pivotal Cut

The minutes shed light on what policymakers were thinking last month during a pivotal meeting during which they decided to cut the central bank’s benchmark interest rate to a range of 4.75% to 5%. The Fed had kept its rate at a two-decade high for more than a year, pushing up borrowing costs on all kinds of loans to slow the economy and subdue inflation.

With inflation cooling back down toward the Fed’s goal of a 2% annual rate, Fed officials had grown less worried about high inflation, the minutes showed. They were more concerned about the job market's health, which had seen a slow but steady increase in the unemployment rate over the last year. By law, the central bank is supposed to use monetary policy to keep inflation low and employment high.

Economic Data Has Changed the Interest Rate Discussion

Since then, economic data has complicated the interest rate outlook. 

The labor market staged a surprising comeback in September, as employers hired more workers than expected, pushing the unemployment rate down, while inflation is expected to continue to ease.

Financial markets are uncertain whether the Fed will cut rates again when the FOMC next meets in November. On Wednesday afternoon, traders were pricing in an 81.4% chance of a 0.25 percentage-point cut in November, down from 85.2% the day before, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

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