Fed Minutes Show Robust Debate About Size of September Rate Cut

Federal Reserve Chair Jerome Powell received some pushback on the half-point interest rate cut in September, as some officials preferred a smaller, quarter-point cut.

“Some participants observed that they would have preferred a 25 basis point [bps] reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision,” according to the minutes of the Federal Open Market Committee’s (FOMC’s) meeting on September 17 and 18, released Wednesday in Washington. However, all participants believed it was appropriate to reduce borrowing costs.

U.S. central bankers lowered the benchmark lending rate by half a percentage point last month, a decisive move to protect the economic expansion as stubborn inflation eases and risks to the labor market rise. Despite the debate, the minutes noted, a “substantial majority” supported the outsized move.

One issue for a number of officials was that such a large move was out of step with their intent to lower interest rates gradually. “Several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved,” according to the minutes.

While Governor Michelle Bowman placed the only dissenting vote against the move, the minutes revealed a deeper split among officials than implied by the near-unanimous decision. It suggests Powell led the committee to a larger move.

After more than a year of holding borrowing costs at a two-decade high to suppress inflation, almost all participants saw the upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased.

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The Path Forward

Forecasts published after the meeting showed a range of views about how much the Fed should cut interest rates by year’s end. Seven officials preferred 75 bps of easing in 2024, while two preferred just 50 bps. Ten policymakers penciled in a percentage point or more of reductions.

Following September’s outsized cut, investors anticipate a quarter-point adjustment at each of the Fed’s two remaining policy meetings this year, according to futures markets.

One challenge for policymakers is the lack of clarity on the so-called “neutral rate”—a level of borrowing costs that neither stimulates nor restrains the economy. While the median long-run rate projection has steadily climbed in recent quarters, individual policymakers’ forecasts ranged from 2.4 percent  to 3.8 percent in September. The economy has remained resilient even in the face of what policymakers deem “restrictive” policy, though the minutes said there was “a range of views about the degree of restrictiveness.”

Powell has prioritized moving inflation back to the Fed’s 2 percent target, but is determined to avoid derailing the economy in the process. In the press conference following the decision, Powell framed the move as guarding against further softening in the job market.

Data released in early September, ahead of the meeting, showed weaker-than-expected employment gains in August and downward revisions to job growth in the prior months.

While the staff forecast for the unemployment rate was only a little higher, their projection for growth in the second half of this year was “marked down” in response to a softening labor market, the minutes showed.

Labor market figures published since the meeting indicat more robust hiring, and the unemployment rate fell to 4.1 percent. The blockbuster September jobs report, released last week, showed U.S. employers added 254,000 jobs, the biggest monthly advance since March.

The Fed’s discussion also covered the central bank’s balance sheet. “Several participants discussed the importance of communicating that the ongoing reduction in the Federal Reserve’s balance sheet could continue for some time, even as the committee reduced its target range for the federal funds rate,” the minutes said.

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