Federal Reserve officials met in September and decided to cut interest rates by half a percentage point, the largest rate reduction in over four years. The minutes of the meeting revealed that members were divided over the economic outlook, with some officials advocating for a smaller quarter-point reduction while others supported the larger move. Ultimately, only one member, Governor Michelle Bowman, voted against the half-point cut, marking the first time a governor dissented on an interest rate vote since 2005. Some participants favored a smaller reduction in order to allow for a more gradual normalization of policy.
Despite the uncertainty surrounding the interest rate decision, markets remained relatively stable following the release of the minutes. Economic indicators show that the labor market is stronger than expected, with nonfarm payrolls increasing by 254,000 and the unemployment rate dipping to 4.1% in September. This data has led to expectations that future rate cuts may not be as aggressive as the September move. Federal Reserve Chair Jerome Powell and other officials have indicated that they expect a total reduction of 50 basis points by the end of 2024, as suggested by the unofficial forecast released after the September meeting.
The minutes revealed that the decision to approve the 50 basis point cut was made in consideration of the progress on inflation and the balance of risks against the labor market. While a substantial majority of participants favored the larger move, there was not specific information on the number of members opposed to it. The decision was described as a recalibration of the policy stance, rather than evidence of a less favorable economic outlook or a signal of more rapid policy easing. Supporters of the larger cut believed it would sustain economic strength and promote progress on inflation.
Under normal circumstances, the Federal Reserve prefers to make quarter-point rate cuts, but made the decision to reduce rates by half a point in light of current economic conditions. Market pricing indicates that the Fed funds rate may end in the 3.25%-3.5% range by 2025, in line with the median projection of a 3.4% rate. However, futures markets suggest a 1-in-5 chance that the Fed may not cut rates at its upcoming meeting in November. Despite market expectations, bond yields have increased significantly since the Fed meeting, with both the 10- and 2-year Treasury yields rising by about 40 basis points.
Overall, the Federal Reserve’s decision to cut interest rates by a half percentage point in September was a result of uncertainty around the economic outlook and a desire to balance confidence on inflation with concerns over the labor market. The minutes of the meeting revealed differences of opinion among members, with some favoring a smaller reduction in order to allow for a more gradual normalization of policy. Despite discussions around the size of the rate cut, the majority of participants believed that the move was necessary to recalibrate policy and sustain economic strength in the face of changing economic conditions.
