Fed Officials Were Divided Over Size Of Last Month’s Jumbo Interest Rate Cut, Minutes Show

Topline

The Federal Reserve pulled back the curtain on the thought process behind one of the most pivotal monetary policy decisions in recent history with Wednesday’s release of minutes from its meeting last month, which resulted in the first rate cut in 4.5 years.

Key Facts

At the Federal Open Market Committee’s Sept. 17-18 meeting, “a substantial majority” of central bankers backed the 0.5 percentage-point cut, rather than 0.25 percentage-point move, a historically unusual kickoff to a rate-cutting cycle during a time of relative economic calm.

But “some” officials said they “preferred” the smaller 25 basis-point move, according to the minutes, revealing an unusually divisive moment at the Fed.

“Several” staff members noted a smaller cut would “signal a more predictable path of policy normalization” and “reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation.”

Other officials, seemingly in the 50 basis-point camp noted the “the costs and challenges of addressing” a “weakening” economy once growth deterioration is already underway, underscoring the divide among Fed staff.

The market reaction to the minutes was muted, but stocks have rallied considerably since the rate cut and bonds have slipped as markets digest the uncertain path of monetary policy; the S&P 500 is on pace to close at an all-time high and 10-year U.S. government bond yields are on track to end the day at their steepest level since July 31 (higher yields indicate lower bond values).

Key Background

In a Sunday note to clients, Bank of America economists Antonio Gabriel and Pedro Diaz identified two key areas to watch ahead of Wednesday’s minutes release: “How much of the committee was really on board” with the bigger cut and whether the Fed was “just making up for not having cut in July” or looking to “get back to neutral” sooner rather than later. Last month marked the first cut to the target federal funds rate since March 2020, and the decision to opt for the bigger 50 basis-point cut caused the first dissenting vote for a FOMC member since 2005, as Michelle Bowman said not opting for a 25 basis-point cut may indicate a “premature declaration of victory” against inflation. The Fed first began hiking rates in early 2022 to combat inflation, which hit a 41-year high that year, but has since moderated considerably. Since the Sept. 18 decision, there has been a steady stream of positive economic developments, including the strongest monthly jobs growth in six months, quieting concerns about a looming recession.

Surprising Fact

The bond market has not moved in the direction many expected in the wake of the Fed rate cut decision, as yields for benchmark 10-year U.S. Treasury notes are up from about 3.6% to a two-month high of over 4% since the Fed lowered rates. That defied expectations heading into the cut, and made some borrowing tied to the 10-year, like mortgage rates, more expensive despite the federal funds rate coming down. But though some borrowing is actually more expensive, it’s not necessarily a bad omen for the Fed, as Morgan Stanley strategists noted Monday fixed income investors are simply “becoming less skeptical on the soft landing outcome,” indicating rising yields are more a vote of confidence in the strength of the economy rather than decreased faith in the Fed’s ability to keep inflation on track.

Crucial Quote

“Looking back, they were behind the curve, slow to move,” Austan Goolsbee, an alternate member of the FOMC and president of the Federal Reserve Bank of Chicago, told Forbes last week about the Fed’s actions during 2021 as inflation took off. But “there are limits to what the Fed could have done,” Goolsbee added, noting the worldwide nature of inflation as the global economy emerged from the COVID-19 pandemic.

What To Watch For

September’s inflation data due Thursday at 8:30 a.m. EDT. Consensus economist forecasts call for the consumer price index’s headline inflation to come in at 2.3%, which would be the lowest rate since Feb. 2021 and awfully close to the long desired 2% level, though the less volatile core inflation is expected to come in at 3.2%, where the metric excluding food and energy inputs stood in July and August. The CPI release could be a “potential reminder the FOMC is not out of the inflation woods,” wrote UBS economists led by Jonathan Pingle, who forecast slightly hotter Sept. core inflation at 3.3%.

Further Reading