Meeting minutes "expose" internal divisions at the Federal Reserve? Powell leads decision to significantly cut interest rates in September

Federal Reserve Chairman Powell encountered some opposition when implementing a half-point rate cut in September, as some officials were more inclined towards a smaller quarter-point cut.

According to the minutes of the Federal Open Market Committee (FOMC) meeting on September 17-18 released in Washington on Wednesday, "some participants believed that they would prefer to lower the target range for the federal funds rate by 25 basis points at this meeting, while other officials indicated that they could support this decision." All participants agreed that lowering borrowing costs was appropriate.

The Fed lowered the benchmark interest rate by half a percentage point last month in an effort to sustain economic expansion, despite easing inflation pressures and rising risks in the labor market. Despite the differences of opinion, the minutes noted that "the vast majority" of officials supported this significant rate cut.

Some officials believed that such a large rate cut was inconsistent with their intention to gradually lower rates. The minutes indicated, "Some participants noted that a 25 basis point rate cut would be more in line with the path of policy normalization, providing policymakers with time to assess the degree of policy constraints as the economy evolves."

Although Fed Governor Bowman was the sole dissenter in this decision, the minutes showed that the officials' disagreements were more pronounced than reflected in the decision that was nearly unanimous. This indicates Powell played a leading role in pushing the committee to implement a larger rate cut.

After keeping borrowing costs at their highest level in 20 years to curb inflation for over a year, almost all participants believed that the upside risks to inflation expectations had diminished, while the downside risks to the labor market had increased.

Outlook

Forecasts after the meeting showed diverging views among officials on the extent of rate cuts needed by the end of this year. Seven officials leaned towards a 75 basis point easing in 2024, while two officials leaned towards only a 50 basis point easing. Another 10 policymakers expected rate cuts of one percentage point or more.

Following the significant rate cut in September, investors expect the Fed to make quarter-point adjustments at each of the remaining two policy meetings this year, according to futures market predictions.

One challenge policymakers face is the uncertainty surrounding the so-called "neutral rate" - the level of borrowing costs that neither stimulate nor restrain the economy. While the median long-term forecast for the neutral rate has steadily risen in recent quarters, individual policymakers' forecasts in September ranged from 2.4% to 3.8%.

Despite policymakers viewing current policy as "restrictive," the minutes noted that there were "different views on the degree of restrictiveness."

Powell prioritizes returning the inflation rate to the Fed's 2% target, but is determined to avoid damaging the economy in the process. In a press conference following the decision, Powell described this move as a measure to prevent further weakness in the labor market.

Labor Market

Data released before the September meeting showed weaker-than-expected job growth in August, with revisions also made to employment data from previous months.

The minutes indicated that staff projections for the unemployment rate only slightly increased, but due to the weakness in the labor market, they "revised down" their expectations for economic growth in the second half of the year Labor market data released since the meeting shows stronger recruitment activity, with the unemployment rate dropping to 4.1%. The September employment report released last week showed that US employers added 254,000 jobs, the largest monthly increase since March.

The Fed's discussion also involved the central bank's balance sheet.

The minutes mentioned, "Some participants discussed the importance of conveying the information that even if the Committee lowers the target range for the federal funds rate, the Fed's actions to continue reducing its balance sheet may continue for some time."