Minutes of the Federal Reserve meeting "dampen" expectations of a significant rate cut, with serious internal divisions within the FOMC

As long as the U.S. labor market remains stable, Federal Reserve Chairman Powell is unlikely to persuade the Federal Open Market Committee (FOMC) to cut interest rates significantly again.

After the FOMC cut the benchmark interest rate by 50 basis points to a range of 4.75%-5% in September, Powell described the move at a press conference as a readjustment aimed at ensuring a strong labor market.

This move broke the typical gradualism of Fed rate changes. Some officials said they supported the move because recent inflation data led them to believe that the inflation rate is moving towards the 2% target.

However, the minutes of the September FOMC meeting released early Thursday Beijing time showed that some officials lean towards cutting rates more gradually, which may be because despite what Fed officials call "restrictive" policies, the U.S. economy still shows significant resilience.

The minutes stated: "Some participants indicated that they would prefer to lower the target range by 25 basis points at this meeting, while some participants indicated that they could support such a decision."

Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington, said: "The hawkish tone is, 'If this is what you want, we'll give it to you'." He said: "Many people at the meeting hoped for a 25 basis point rate cut."

The minutes stated that a "substantial majority" supported the 50 basis point rate cut. Tang called this a "rare statement" and added, "What they can't say is that almost everyone supports it."

At a National Association for Business Economics conference in Nashville on September 30, Powell nodded and indicated a preference for a gradual approach.

"This is not a committee that is in a hurry to cut rates quickly," Powell said. "This is a committee that wants to be guided, and ultimately we will be guided by the new data we receive."

Labor market data for September showed a significant rebound in employment numbers from the slowdown of the previous three months. Employment increased by 254,000 people, and the unemployment rate fell to 4.1%. The Atlanta Fed's GDP tracker currently estimates an annualized economic growth rate of 3.2% for the third quarter. Some Fed officials have indicated a preference for a more gradual approach.

"The Fed megaphone" Nick Timiraos said that at the previous month's meeting, there was disagreement among Fed officials on the magnitude of rate cuts, with a substantial majority supporting the larger 50 basis point cut that was ultimately approved, while others supported a smaller 25 basis point cut. The just-released minutes shed light on the discussion about why officials chose to start the first rate cut since 2020 with a bolder 50 basis points. The decision to lower rates to a range of 4.75% to 5% was supported by 11 out of the 12 members of the Fed's rate-setting committee A policymaker opposed this decision and supported a smaller rate cut. The meeting minutes stated that those who supported a larger rate cut "generally believed that this recalibration of the monetary policy stance would begin to better align it with recent inflation and labor market indicators." Some officials believed that the 25-basis-point rate cut at the end of July's last meeting was "reasonable," and recent data only confirmed the reasons for the rate cut.

Timiraos also noted that while the Fed cut rates by 50 basis points in September, the Fed typically prefers to adjust policy rates by 25 basis points, as this gives officials more time to study the effects of policy changes. In fact, the meeting minutes showed that an unspecified number of officials believed that considering robust economic activity, low unemployment, and inflation still above the Fed's target, a smaller rate cut last month (July) was justified. The meeting minutes stated that some officials believed that a smaller rate cut "may signal a more predictable path to policy normalization." The minutes also showed that some officials who supported a larger rate cut hinted that they might also support a smaller rate cut. Before the meeting last month, some officials had indicated that they would prefer to start with smaller adjustments and accelerate the pace once the economy appeared to weaken further.

Here are more key points from the September FOMC meeting minutes:

A significant rate cut is not a signal of concern about the economy or a signal of rapid rate cuts

The minutes stated that officials unanimously agreed that the larger rate cut passed at the meeting should not be seen as a signal of concern about the economic outlook or as a signal that the Fed is prepared to cut rates rapidly. Officials commenting on the restrictiveness of monetary policy believed that monetary policy is restrictive, although they held a range of views on the degree of restrictiveness. Participants also emphasized the importance of communication. The importance of communication is to clearly convey that the committee's monetary policy decisions depend on the evolution of the economy and its impact on the economic outlook and risk balance, so this is not a predetermined path. In addition, some participants indicated that even if the committee lowered the target range for the federal funds rate, the Fed's balance sheet reduction process could continue for some time.

Risks of cutting rates too late or too early

Some participants emphasized that cutting policy restrictions too late or too little could risk excessively weakening economic activity and employment. Some participants particularly emphasized that once this weakening begins in earnest, the costs and challenges of addressing it would be greater. However, several participants also stated that cutting policy restrictions too early or too much could stall or reverse progress in combating inflation. Some participants pointed out that the uncertainty about the long-term neutral interest rate level complicates the assessment of the degree of policy restrictions, and they believe that gradually reducing policy restrictions is appropriate.

Inflation upside risks diminish, downside risks to employment increase

Participants discussed risks and uncertainties related to the economic outlook. Almost all participants believed that the upside risks to the inflation outlook had diminished, while the downside risks to employment were considered to have increased. Therefore, these participants assessed that the risks of achieving the committee's dual mandate goals are now roughly balanced However, some participants believe that the risk of a significant weakening in the labor market has not increased. Several participants specifically pointed out the inflation risks associated with geopolitical developments. In addition, some participants noted that a more accommodative financial environment than expected, stronger-than-expected consumption growth, or continued strong increases in housing service prices could hinder progress towards the Committee's 2% inflation target.

Economic activity continues to expand at a steady pace

Participants noted that the U.S. economic activity continues to expand at a steady pace, highlighting the resilience of consumer spending. Several participants pointed out that the increase in real household income boosted consumption, but some noted signs of spending slowing down or household budgets tightening, including rising credit card and auto loan delinquency rates. Some participants believe that financial pressures faced by middle- and low-income households may imply a slowdown in consumption growth in the near future. Many participants reported that their business contacts are optimistic about the economic outlook, but they remain cautious in hiring and investment decisions. Participants noted favorable developments in total supply, including productivity improvements, which have promoted the recent steady expansion of economic activity. Several participants also discussed the potential impact of introducing new technologies into the workplace. Many participants emphasized that they expect real GDP to grow at a trend pace over the next few years.

Labor market conditions have eased somewhat

Participants pointed out that labor market conditions have eased further in recent months, with the current tightness in the labor market easing compared to pre-pandemic levels after experiencing overheating in recent years. As evidence, participants noted that two employment reports received since the July meeting showed slowing job growth, rising unemployment rates, declining recruitment and job vacancy data, decreasing resignation and job search rates, and widespread reports from business contacts indicating low difficulty in hiring workers. Although some participants emphasized a significant increase in the net unemployment rate since April 2023.

However, participants also noted that labor market conditions remain solid, as layoffs are limited and the number of initial claims for unemployment benefits remains low. Many participants pointed out that assessing labor market developments is challenging, with factors such as increased immigration, revised wage data, and potential changes in the growth rate of potential productivity considered complex factors. Looking ahead to the labor market outlook, participants indicated that further cooling does not seem necessary to help inflation return to 2%. Some pointed out that as labor market conditions ease, continued accommodation could transition to increased risks of more severe deterioration.

Inflation, while still elevated, trends in line with falling to target levels

When discussing inflation developments, participants noted that the inflation rate remains somewhat elevated, but almost all participants believe that recent monthly data is consistent with the continued decline towards 2%. Some participants stated that while food and energy prices have played a significant role in the overall decline in inflation rates, the slowdown in the rate of price increases in a wide range of goods and services has become more apparent. It is worth noting that core commodity prices have declined in recent months, and the growth rate of core non-housing service prices has further decreased. Many participants also pointed out that inflation developments in the second and third quarters of 2024 indicate that the stronger-than-expected inflation data in the first quarter was only a temporary interruption in the process towards 2% When it comes to the outlook for inflation, almost all participants expressed increased confidence that inflation will continue to move towards 2%.

Participants listed various factors that could continue to exert downward pressure on inflation. These include further moderate slowing of real GDP growth, stable inflation expectations, and softening global commodity prices. Several participants noted that nominal wage growth continues to slow, with a few indicating signs that nominal wage growth will further decline. In addition, several participants pointed out that due to rough balance between supply and demand in the labor market, wage increases are unlikely to become a source of widespread inflation pressure in the near future. Participants emphasized that inflation rates are still somewhat high, and they will firmly commit to bringing the inflation rate back to the 2% target