Minutes of the Federal Reserve meeting reveal significant disagreement over a large rate cut in September: "some" policymakers prefer a 25 basis point cut instead

Highlights:

"The vast majority" of attendees support a 50 basis point rate cut.

The resolution shows that ultimately only one person voted against the 50 basis point cut, but the minutes show that "some" attendees believed there was a reason to cut by 25 basis points in the July meeting, some believed that a 25 basis point cut aligns with the gradual normalization of policy, and "a few" could have supported a 25 basis point cut in September.

Some believe that a 25 basis point cut may indicate a more predictable policy path, while others believe that the overall policy path, not the initial rate cut magnitude, is more important in determining the extent of policy accommodation.

Monetary decisions are not predetermined and depend on economic developments, economic outlook impacts, employment, and inflation risk balance.

There are differing views within the Federal Reserve on the degree of tightening, with some emphasizing the need for external communication, stating that even with rate cuts, balance sheet reduction may continue for some time.

Due to softer labor market indicators, Federal Reserve staff have lowered their economic growth forecasts for the second half of this year; almost all policymakers believe that the downside risks to employment prospects have increased, with risks to achieving inflation and employment goals roughly balanced.

Almost all policymakers have more confidence in inflation persistently falling to target, with some noting that nominal wage growth continues to slow, and others stating that wage increases are unlikely to become a widespread source of inflation pressure in the near term.

"New Federal Reserve News Agency": The minutes show that the vast majority of officials support a larger rate cut, as the economy remains robust, the unemployment rate is low, and inflation remains above target, while an unspecified number of officials believe a small rate cut is reasonable; the minutes mention fewer factors determining future decisions.

The recent meeting minutes revealed a significant division within the Federal Reserve three weeks ago over the decision to make a large rate cut. While ultimately only one person voted against a 50 basis point cut, during the meeting discussions, "some" policymakers favored a more conventional 25 basis point rate cut, and "a few" may have originally supported a 25 basis point cut.

Nick Timiraos, a senior Federal Reserve reporter known as the "New Federal Reserve News Agency," later wrote about the division exposed in the meeting minutes, summarizing it as: "'The vast majority' of officials support a larger 50 basis point rate cut, but some officials support a smaller 25 basis point rate cut."

Timiraos' article points out that the Federal Reserve typically prefers to adjust rates by 25 basis points, as it allows Fed officials more time to study the impact of policy adjustments. The minutes of this meeting show that an unspecified number of officials believe that given the robust economic activity, low unemployment rate, and inflation still above the Fed's target, a smaller rate cut in September was reasonable.

The article states that there is less mention in the minutes about which factors will determine future rate decisions, with the minutes stating that if inflation continues to fall towards the Fed's 2% target and employment continues to grow in line with recent trends, "then over time, it may be appropriate for the policy stance to shift more neutral."

"Some" attendees believed there was a reason to cut by 25 basis points in the previous meeting, "a few" could have supported this cut in September

On Wednesday, October 9th, the Federal Reserve released the meeting minutes, showing that at the Federal Open Market Committee (FOMC) meeting ending on September 18th, given the progress made in lowering inflation and that "almost all" attendees believed the risks to achieving employment and inflation goals were roughly balanced, meeting participants unanimously agreed to cut rates, but they had differing views on the extent of the rate cut Minutes wrote, "A substantial majority of attendees support a significant 50 basis point rate cut. They generally believe that this 'recalibration' of the monetary policy stance will begin to align the stance more closely with recent inflation and labor market indicators. They also emphasize that this move will help maintain strong momentum in the economy and labor market, while continuing to promote progress in lowering inflation and reflecting the balance of risks to employment and inflation.

In contrast, other decision-makers support a smaller rate cut of 25 basis points, with some pointing out that there was reason to cut rates by 25 basis points at the last meeting in July. The minutes stated:

"Some attendees pointed out that there was reason to cut rates by 25 basis points at the last meeting, and data released during the two meetings further demonstrate that inflation is sustainably moving towards 2% while the labor market continues to cool. Due to inflation still being somewhat elevated, robust economic growth, and low unemployment rates, some attendees indicated that they would prefer to lower the target range for the policy rate by 25 basis points at this meeting. A few others stated that they might have supported this decision.

Several attendees noted that a 25 basis point rate cut is in line with the gradual normalization of monetary policy, allowing policymakers time to assess the degree of policy constraints as the economy evolves.

A few attendees also mentioned that a 25 basis point rate cut may signal a more predictable path for policy normalization. Some attendees pointed out that in determining the degree of policy constraints, what is more important is the overall path of policy normalization rather than the specific magnitude of the initial easing at this meeting."

According to the above statement, Federal Reserve decision-makers who support a 25 basis point rate cut should be more than just one person as reflected in the post-meeting decision statement.

The decision statement shows that among the FOMC voting members, 11 people supported a 50 basis point rate cut, with only Federal Reserve Governor Bowman casting a dissenting vote, advocating for a 25 basis point rate cut. As a result, Bowman became the first Federal Reserve Governor since 2005 to vote against the majority decision at an FOMC interest rate meeting.

Monetary policy depends on economic development, economic outlook impact, and the balance of employment and inflation risks

When discussing the outlook for monetary policy, Federal Reserve decision-makers emphasize the need to make it clear to the public that this rate cut should not be seen as the Federal Reserve expecting a bleak economic outlook. They believe that decisions depend on changes in economic conditions, the impact on economic outlook, and the balance of risks between employment and inflation. The minutes stated:

"Participants emphasized that the recalibration of policy stance at this meeting should not be interpreted as evidence of a less optimistic economic outlook, nor should it be interpreted as implying that the pace of policy relaxation will be faster than participants' assessment of the appropriate path."

"Participants generally believe that it is necessary to convey the message that the monetary policy decisions of the FOMC depend on the development of the economy, the impact on the economic outlook, and the balance of risks, and therefore are not predetermined."

Different Views on the Degree of Tightening, Balance Sheet Reduction May Continue for Some Time

The minutes also mentioned that there are different views within the Federal Reserve on the current degree of monetary policy tightening, with some emphasizing the need to communicate externally that even if interest rates are lowered, balance sheet reduction may continue.

"Those assessing the degree of monetary policy tightening indicate that they believe monetary policy is tight, although they have expressed a range of views on the degree of tightening."

"Several participants discussed the possibility that, even if the FOMC lowers the target range for the federal funds rate, the continued reduction of the Fed's balance sheet may also persist for some time, which is important."

Nearly All Decision Makers See Increased Downside Risks to Employment Prospects

Regarding the economic outlook, at the September meeting, Federal Reserve staff predicted that the U.S. economy would remain robust, with the forecast for real GDP growth similar to that of the July meeting, but the unemployment rate slightly higher than expected in July. The minutes stated:

"While actual GDP growth in the second quarter exceeded staff expectations, the economic growth forecast for the second half of this year has been revised down, largely due to recent labor market indicators weaker than expected."

When discussing risks and uncertainties related to the economic outlook, participants pointed out that the downside risks to employment have increased. The minutes stated:

"Almost all participants believe that the upside risks to the inflation outlook have diminished, while the downside risks to the employment outlook have increased. Therefore, these participants now assess that the risks to achieving the dual mandate goals of the FOMC are roughly balanced."

Nearly All Decision Makers Have More Confidence in Inflation Continuing to Approach Target

Regarding the inflation outlook, the minutes show that "almost all participants indicated that they have increased confidence in inflation continuing to approach 2%", and listed some factors that may continue to exert downward pressure on inflation.

These factors include further modest slowing of real GDP growth due to the Fed's monetary tightening; well-anchored inflation expectations; weakened pricing power; productivity improvements; softening global commodity prices.

Some participants pointed out that nominal wage growth continues to slow, with a few indicating signs that wage growth will further decline. These signs include a decrease in the growth rate of cyclically sensitive wages, and data indicating that job switchers are no longer receiving higher wages than other employees. A couple of participants noted that as wages account for a significant portion of costs in service sector businesses, a slowdown in nominal wage growth would be particularly helpful for downward inflation in that industry In addition, some participants pointed out that due to the rough balance between supply and demand in the labor market, wage increases are unlikely to become a common source of inflationary pressure in the near term.

Regarding service prices in the real estate market, some participants indicated that inflation could accelerate downward quickly, reflecting a slowdown in the rate of rent increases faced by new tenants. Participants emphasized that the inflation rate remains relatively high, and they are firmly committed to bringing inflation back down to the Federal Reserve's target of 2%