The first time since 2005! The Federal Reserve "unusual divergence", sharp traders "it's hard to say whether there will be a significant rate cut next"

The Federal Reserve cut interest rates by a significant 50 basis points overnight, officially starting an easing cycle. However, the internal voting details about this decision have attracted attention from the public.

The "rare divergence" within the Federal Reserve, combined with Powell's dovish statement "The Fed is not in a hurry", has made traders start to hesitate. Will there be further significant rate cuts in November and December?

The first "dissenting vote" in nineteen years goes against Powell's "unity is strength" style

The decision statement this time shows that not all FOMC voting members supported a 50 basis point rate cut. Among them, 11 people supported the 50 basis point cut, with only one person voting against it, that is Federal Reserve Board Governor Michelle Bowman, who advocated for starting this easing cycle with a small 25 basis point cut.

As a result, Bowman became the first Federal Reserve Board Governor since 2005 to vote against the majority of FOMC members' decisions at an interest rate meeting.

Some media outlets have stated that before 1995, it was not uncommon for Federal Reserve Board Governors to hold opposing views at meetings, but in the over 90 dissenting opinions since then, the vast majority were from the Federal Reserve Chair. The Federal Reserve Chair usually seeks consensus on decisions, sometimes reaching compromises to avoid public dissent, as it could be seen as undermining their credibility.

Overall, dissent in Federal Reserve meetings is rare, especially during Powell's tenure as Chair. The last time an FOMC voting member opposed the overall decision was in June 2022, when a regional Federal Reserve Bank President voted against it. Then Kansas City Federal Reserve Bank President Esther George advocated for a small rate hike.

In fact, before this meeting, the "silence" of the Federal Reserve could also reflect that not all voting members were on the same page with him to a certain extent. Because as usual, the Federal Reserve either communicates decision information through many Federal Reserve Bank Presidents or hints at the decision direction through the "Fedwire" of The Wall Street Journal, which is different from the situation before this decision.

Some traders commented on this, saying that from Powell's overall style of "unity is strength," this situation actually looks quite "strange," especially on the eve of the U.S. election:

Powell may be the most consensus-oriented Federal Reserve Chair in history, with only one dissenting vote at every meeting since the COVID-19 pandemic.

Starting with a 50 basis point rate cut will definitely result in at least one (like Bowman), and possibly two (like Barkin or Bostic), dissenting votes, which is very inconsistent with his style, especially on the eve of the election.

For someone who does not want to be called "Arthur Burns 2.0," this would be a rather strange turn of events

Arthur Burns served as the Chairman of the Federal Reserve in the early 1970s, and his policy stance was considered too loose in addressing inflation issues, laying the groundwork for the later "stagflation".

So the question now is, is Powell willing to take the risk of becoming "Arthur Burns 2.0", while also going against his consistent image as the Chairman, to cut interest rates by 50 basis points? What does this represent?

Will there be further significant interest rate cuts in November? Traders: It's hard to say

Looking ahead to the Fed's future rate cut pace, at least for now, the market is not convinced that significant rate cuts will become the new norm.

According to Bloomberg, Citi trader Akshay Singal, although accurately predicting weeks ago that this rate cut would be 50 basis points , is now reconsidering whether to continue betting on even larger rate cuts due to Powell and other FOMC members' cautious attitudes:

This 50 basis point rate cut is a rather hawkish decision... Overall, the Fed may be satisfied with this outcome, which is not considered overly loose, but its negative impact is puzzling to the market.

Singal believes that Powell holds significant power in driving policy, but he is clearly more dovish than other members, which is confusing to him:

Powell wields significant power, and the key in the coming months is to understand how dovish he really is.

He also added that the next two non-farm payroll reports (October 4th and November 1st) will have a significant impact on the Fed's next steps.

Dot plot: Essentially overturning expectations from June, with over half of policymakers expecting at least a total of 50 basis points in rate cuts this year

Compared to the dot plot released by the Fed in June this year, this time Fed officials have significantly increased their expectations for rate cuts over the next three years.

The median expected interest rate for this year in the dot plot has dropped from 5.125% in the previous release to 4.375%, next year and in 2025 from 4.125% to 3.375%, with a 75 basis point decrease in both cases, and in the following year, the median expected rate has dropped from 3.125% to 2.875%, a 25 basis point decrease.

Among the 19 officials providing forecasts, all now expect rates to be below 5.0%, compared to only eight in the previous release. Only two officials expect rates to be between 4.75% and 5.0%, seven expect rates to be between 4.5% and 4.75%, nine expect rates to be between 4.25% and 4.5%, and one even expects rates to be below 4.5%, between 4.0% and 4.25%In other words, out of the 19 officials, a total of ten, accounting for nearly 53%, are expected to cut rates by a total of 50 basis points this year. Slightly more than half of the officials expect that in the remaining two FOMC meetings in November and December this year, there will be at least a 25 basis point rate cut at each meeting.

The following chart shows the changes in the Fed officials' interest rate expectations reflected in the dot plot, with blue dots representing the expectations in the September dot plot and gray dots representing the expectations in the June dot plot.

A comparison of the interest rate expectations for the next two years in the previous and current dot plots reveals that the Fed policymakers have actually overturned all previous expectations.

The post-meeting release of the median Fed officials' interest rate forecasts shows that compared to the previous outlook forecast in June this year, Fed officials have lowered their interest rate expectations for the next three years. The expected interest rate levels for the next two years have been reduced by a total of 70 basis points, and by 20 basis points for the following year.

Based on the median forecast, Fed officials expect that after the rate cut in September, there will be a total of 50 basis points in rate cuts this year, possibly two 25 basis point rate cuts, meaning a total of 100 basis points in rate cuts for the year.