Fed officials were divided on whether to cut interest rates by half a point in September, minutes show

WASHINGTON — Federal Reserve officials at their September meeting agreed to cut interest rates but were uncertain about how aggressively, ultimately deciding on a half-percentage-point cut in an effort to balance sentiment about inflation. outbreak with worries about the labor market, according to minutes released Wednesday.

The meeting detailed the reasons why policymakers decided to pass a massive 50 basis point interest rate cut for the first time in more than four years and showed members divided on the outlook. economy.

Some officials hope for a smaller decline, a quarter of a percentage point, as they seek reassurance that inflation is falling sustainably and worry less about the jobs picture.

In the end, only one Federal Open Market Committee member, Gov. Michelle Bowman, voted against a half-point cut, saying she preferred a quarter-point cut. But the minutes indicate that others also favored a smaller move. This is the first time a governor has dissented on an interest rate vote since 2005 for a Fed known for its unity on monetary policy.

“Some participants noted that they would like a 25 basis point reduction in the target range at this meeting and several others indicated that they might support such a decision,” the minutes stated.

The document added: “Some participants noted that a 25 basis point reduction would be consistent with a gradual policy normalization path, allowing policymakers time to assess the extent policy restrictions as the economy develops. “Some participants also added that a 25 basis point move could signal a more predictable path to policy normalization.”

Since the meeting, economic indicators have shown the labor market is perhaps stronger than officials backing the 50 basis point move had expected.

In September, nonfarm payrolls increased by 254,000, much higher than expected, while the unemployment rate fell to 4.1%.

The data helped bolster expectations that while the Fed may be in the early days of its easing cycle, future cuts are unlikely to be as drastic as the move in September. Seat Jerome Powell and other Fed officials in recent days have backed the expected 50 basis point reduction indicated by 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 the context of progress on inflation and balancing risks” to the labor market. The minutes noted that “the majority of participants” supported the larger move but did not specify how many opposed it. The term “participant” suggests participation by the entire FOMC rather than just 12 constituencies.

The minutes also noted that some members favored cuts at the July meeting but that never materialized.

While the document further details the debate over whether to approve the 25 basis point cut, not much is known about why voters supported the larger move.

At a news conference after the meeting, Powell used the term “recalibration” to summarize the cutback decision, and the term also appeared in the minutes.

“Participants emphasized that it was important to communicate that the readjustment of policy stance 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 will be faster than participants’ assessments.” of the appropriate path,” the minutes state.

Such a readjustment would bring policy “more in line with recent inflation and labor market indicators.” Advocates of a 50 basis point cut “also emphasized that such a move would help maintain the strength of the economy and labor market while continuing to fuel progress on inflation and would reflect balance of risks.”

Under normal circumstances, the Fed prefers to cut increases by a quarter of a point. Previously, the central bank only raised half a point during the Covid period and before that the 2008 financial crisis.

According to CME Group’s FedWatch, market pricing is pointing to the federal funds rate ending 2025 at 3.25%-3.5%, roughly in line with the median forecast of a 3.4% rate. %. Futures markets have previously pointed to a more positive path and in fact are now assessing a roughly one in five chance the Fed will not cut interest rates at its November 6-7 meeting.

However, the bond market acts differently. Since the Fed meeting, both 10- and 2-year Treasury yields have increased about 40 basis points.