"New Federal Reserve News Agency": After another interest rate cut this week, the Federal Reserve is prepared to slow down or even stop interest rate cuts

The Federal Reserve's last monetary policy meeting of the year will be held this Tuesday, followed by the announcement of the interest rate decision on Wednesday.

As the Federal Reserve enters its quiet period, "New Federal Reserve News Agency" Nick Timiraos published an article in The Wall Street Journal on the 15th, stating that investors generally expect a third rate cut this week. Subsequently, officials are prepared to slow down or even stop rate cuts:

One option this week is to cut rates by a quarter of a percentage point and then use new economic forecasts to strongly suggest that the central bank is ready to slow the pace of rate cuts.

The article points out that, faced with differing voices internally, Powell must balance policy adjustments. Since late summer, the frequency and magnitude of rate cuts have raised questions among some Federal Reserve officials, who are concerned that too rapid a rate cut may send the wrong market signals.

Jon Faust, a former senior advisor to Fed Chair Powell, stated that the current monetary policy of the Federal Reserve is at a crossroads, where it can either cut rates or choose to hold steady:

“The overall judgment of Federal Reserve officials regarding the future direction of interest rates may be more influential than their specific decision for the next meeting.”

Seeking Balance Between "Going Too Far" and "Not Going Far Enough"

Timiraos noted that there are divisions within the Federal Reserve regarding the continuation of rate cuts. Some hawkish officials are concerned that premature rate cuts could keep inflation high and damage the credibility of the Federal Reserve. Additionally, some policies implemented since Trump's administration may push inflation higher. Former Boston Fed President Eric Rosengren stated:

“If I were sitting on the committee as a voting member right now, I would oppose a rate cut.”

The performance of the stock market and speculative assets like Bitcoin has raised concerns among hawkish officials. Federal Reserve Governor Michelle Bowman stated in a speech earlier this month:

“Given the recent economic activity, it is hard to argue that the current level of interest rates is restrictive.”

Dallas Fed President Lorie Logan warned against cutting rates too much, as she believes that a more "normal" economic interest rate is much lower.

Meanwhile, dovish officials are worried about slowing economic growth and believe it is necessary to cut rates to stimulate the economy. They argue that the Federal Reserve has raised rates significantly over the past two years and now needs to carefully assess the risks of rate cuts.

Powell believes that it is essential to prevent inflation from being too high while also avoiding sluggish economic growth. He emphasized that the Federal Reserve needs to find a balance between "going too far" and "not going far enough":

“We are aware of the risk of going too far, too fast, but we also need to be mindful of the risk of not going far enough. It seems we are in the place we need to be.”

Timiraos pointed out that currently, the U.S. labor market is performing delicately, with both hiring and layoff rates at low levels. Economic growth is relatively stable, but the unemployment rate has risen. Interest rate-sensitive sectors, such as housing, have not yet fully benefited from rate cuts.

Inside the Federal Reserve's Rate Cut Decision: Balance, Controversy, and Adjustment

Timiraos noted that Powell needs to work hard to reach a consensus among the 18-member committee. Despite some easing in inflationary pressures, there are still divisions within the committee regarding the direction of interest rate policy.At the beginning of 2023, some officials who originally held a hawkish stance began to change their attitudes, gradually accepting a more moderate inflation report. Federal Reserve Governor Waller boldly suggested that interest rates be cut six times by 25 basis points in 2024, becoming one of the officials advocating for the largest rate cuts. With the stagnation of inflation in the spring, Waller's views also changed, shifting to support maintaining interest rates.

On the eve of the September meeting, Federal Reserve officials signaled a tendency towards a modest rate cut through public speeches. However, in a closed-door meeting, Powell and his advisory team made an unexpected decision: to cut rates significantly by 50 basis points.

Timiraso pointed out that this decision drew on former Chairman Greenspan's risk management strategy. Considering the economic development trends and the possibility of multiple future rate cuts, the decision-makers believed that the risks of a significant rate cut were relatively low.

This decision was not unanimous. Bowman cast a dissenting vote, marking the first time since 2005 that a governor opposed the Federal Reserve's monetary policy decision. To quell internal disputes, Powell emphasized in subsequent public remarks that a 50 basis point cut was not a new pace and that decisions would be made cautiously in subsequent meetings.

Subsequent economic data revealed that the resilience of the U.S. economy exceeded expectations. Income growth and personal savings rates were higher than initially estimated, alleviating concerns about an economic recession. This indicated that the Federal Reserve's significant rate cut might have been too aggressive.

Waller initially supported a smaller rate cut but was ultimately persuaded. He later acknowledged that this decision was akin to buying insurance; even if it was not ultimately needed, it was wise to be prepared in advance.

In summary, the Federal Reserve's rate cut decision-making process was filled with complexity and uncertainty. The internal disagreements within the committee, the constantly changing economic data, and the decision-makers' assessments of risk all had a significant impact on the final policy direction