Under the leadership of Jerome Powell, the Federal Reserve showed even more strength after a significant rate cut, so another 50 basis points cut is not difficult

A week before Federal Reserve officials gathered in Washington this month, they were fiercely debating the pace of rate cuts.

The U.S. economy did not show the usual clear warning signals that would prompt the Fed to act decisively. However, a series of employment data, including the August jobs report, showed significant weakness, leading Fed Chair Powell to believe that a larger rate cut than usual was necessary to guard against rising risks in the labor market. Two inflation reports that week showed continued easing of price pressures, ultimately leading to the decision to cut rates by 50 basis points.

When the Fed announced its decision on September 18th, forecasts showed that the vast majority of officials supported lowering the benchmark rate by a full percentage point or more this year, indicating at least one significant rate cut. However, a considerable number believed that only 75 basis points were needed, suggesting support for three smaller rate cuts.

In the end, of the 12 voting members of the Federal Open Market Committee (FOMC), all but one supported Powell's aggressive 50-basis-point rate cut to start. This was a crucial victory for Powell as he seeks to extend an economic expansion that many had predicted to be over. The lone dissenter, Fed Governor Bowman, called for a more moderate pace of rate cuts to avoid disrupting progress on inflation.

Mark Spindel, founder of Potomac River Capital and co-author of a book on the Fed and Congress, said, "Fed chairs always have enormous power. Powell was able to get everyone on board except Bowman, which is clearly a success story. He is now a more powerful chair."

Powell stated at a press conference after the meeting that the 50-basis-point rate cut was "a good, strong start" and was reasonable from both an economic and risk management perspective.

Economists say that if the economy starts to slide, another 50-basis-point rate cut is not ruled out, as long as inflation remains subdued, Powell will prioritize keeping the economy close to full employment. If labor market data disappoints again, Powell may have the opportunity to sway his colleagues towards another 50-basis-point rate cut in the coming months.

Some officials indicated in recent speeches that they are likely to support another 25-basis-point cut, but also left the door open for another significant rate cut.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, said, "Given his comments at Jackson Hole and what we heard from him at the press conference, yes, I think if the labor market weakens further, Powell would lean towards another 50-basis-point rate cut."

Three Key Moments

Over the past year, Powell has played a leadership role in three key moments:

He indicated that rates may peak in December 2023, while at the time some officials thought they might have to raise them further In a surprising turn of events, the inflation rate in the first quarter of 2024 unexpectedly rose, catching many Federal Reserve officials off guard. Subsequently, he patiently maintained interest rates until he gained confidence that price pressures were easing once again. Some lawmakers complained that he was putting the economy at risk.

In the end, he opted for a bold interest rate cut as the first move.

All these actions were carried out under a strong guiding principle, that high interest rates are cooling the economy, not causing it to collapse.

Speaking at a press conference on September 18, Powell said, "Whether we can achieve these goals successfully concerns all Americans." Powell described the interest rate cut as further insurance against economic softening—a risk management move.

Powell said last week, "You can see this as our commitment to not fall behind. This is a strong move."

In the absence of an urgent crisis, a 50 basis point adjustment in interest rates by the Federal Reserve is not common. There are concerns that this would indicate increasing worries about signs of economic weakness.

Instead, Powell stated that this move indicates his belief that the inflation rate is expected to return to the 2% track. He also rarely admitted that a larger move was his strong preference, and he expressed satisfaction with this decision.

The latest employment report not only showed fewer jobs added by employers in August than expected, but also indicated a slower pace of hiring compared to the initial values of the previous two months. Employment decreased by 86,000 people in June and July, hitting a new low since mid-2020 in the three-month average.

Risk management is a strategic approach advocated by former Fed Chairman Alan Greenspan to ward off potential threats, even those that seem unlikely to materialize. As the Federal Reserve's benchmark interest rate remains in a restrictive range even after a 50 basis point cut, some officials believe that the cost of a significant interest rate cut is low.

Minneapolis Fed President Kashkari wrote in an article on September 23, "Even after a 50 basis point rate cut, I believe the overall stance of monetary policy remains tight."

Heated Debate

Powell's schedule shows that in the days leading up to each FOMC meeting, he holds discussions with all 18 officials. These discussions allow officials to understand the chairman's position.

Powell strongly supported a larger interest rate cut at the press conference, indicating his inclination towards a 50 basis point cut during routine talks with officials in the week before the meeting.

Some Federal Reserve officials who spoke after the meeting described the meeting and the preparations before it as a heated debate.

"There was a vigorous discussion at the meeting," Kashkari said in an interview with CNBC on September 23. "Clearly, there was a lot of discussion before the meeting."

Atlanta Fed President Bostic stated that the two weeks leading up to each FOMC meeting are times of "intense debate."

During a Q&A session after a speech on September 23, he said, "If you want to get consensus, if you want us all to rally around an action plan, it will take a lot of communication, engagement, and we've done a lot of that work Some officials believe there is a reason to cut interest rates by 25 basis points at the meeting in September. This includes Federal Reserve Board Governor Waller, who is one of the most influential members of the FOMC.

In his speech on September 6th, Waller clearly stated his support for a rate cut, but many interpreted his precise wording as a reason for proposing a 25 basis point cut. In an interview with CNBC after the meeting, he said that the reports on consumer and producer prices released after the speech ultimately led him to support a 50 basis point rate cut