There was a divide within the Federal Reserve about whether its first interest rate cut in more than four years should be big or small, according to minutes from the central bank's September meeting released Wednesday.
A "substantial majority" of Fed officials supported lowering rates by 50 basis points at the last meeting, but “some” would have preferred to have lowered by 25 basis points and "a few others indicated that they could have supported such a decision," the minutes read.
Those who argued for a 25 basis point reduction noted that inflation was still somewhat elevated, while economic growth was strong and unemployment low.
Several said a smaller cut would line up more with a gradual reduction in the policy rate that would be more predictable and allow more time to assess any impacts on the economy.
Those who argued for a jumbo-sized cut said a 50 basis point move would help sustain strength in the economy and the job market while continuing to bring down inflation.
Some even said there had been a case for a 25 basis point rate cut at the previous meeting in July, and that recent data offered even more evidence that inflation continues to drop while the labor market cools.
Some of this internal division at the Fed was made public on Sept. 18 as the decision to cut by 50 basis points was announced, with Fed governor Michelle Bowman dissenting and saying she preferred 25 basis points.
No Fed official had voted against a policy decision in two years, matching one of the longest such streaks in the past half-century. Moreover, no Fed governor had dissented on a rate decision since 2005.
The Fed's rate-setting committee was also almost evenly split on the number of additional rate cuts expected this year, with seven policymakers favoring one additional 25 basis point rate cut before year-end and nine members favoring 50 basis points of additional easing. Two policymakers expected no more rate cuts.
Fed Chair Jerome Powell, in a press conference with reporters last month, acknowledged the dissent but also said there was "broad support" for the cut and a "lot of common ground" among his fellow policymakers.
Fed Chair Jerome Powell, at last month's press conference. (REUTERS/Tom Brenner) ·Reuters / Reuters
In the week since the decision, several policymakers have offered public support for a jumbo rate cut of 50 basis points, citing progress on inflation and a cooling job market.
Atlanta Fed president Raphael Bostic has said that residual concerns might have led him to trim by a smaller 25 basis points at the September policy meeting, but that would have ignored a recent cooling in the job market.
Minneapolis Fed president Neel Kashkari said he voted in favor of cutting by 50 basis points because "the balance of risks has shifted away from higher inflation and toward the risk of a further weakening of the labor market, warranting a lower federal funds rate."
Chicago Fed president Austan Goolsbee also said he was "comfortable" with a 50 basis point cut, viewing it "as a demarcation" that the central bank is now back to thinking as much about achieving maximum employment as it is price stability.
But a stronger-than-expected jobs report released last week now has analysts wondering whether the central bank will curtail rate cuts or if it moved too quickly with a 50 basis point reduction. There are also worries that inflation could be re-elevated as a concern.
Fed officials will get a fresh reading on inflation Thursday when the Consumer Price Index is due out. That measure is expected to keep in line with what officials want to see.
Economists expect core inflation — which eliminates volatile food and energy prices the Fed can’t control — held steady on an annual basis in September at 3.2% from the same level in August. Month over month, CPI is expected to have grown by 0.2%, compared with 0.3% in August.
Some Fed officials are urging a gradual path to cuts as they look to balance downside risks to unemployment with continuing to bring down inflation.
Dallas Fed president Lorie Logan became the latest official to voice that view on Wednesday, saying in a speech that “a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals.”
Powell made it clear in remarks on Sept. 30 that the central bank isn’t in a "hurry" to bring interest rates down and would prefer smaller cuts.
He also reiterated that the consensus of Fed officials outlined at the September meeting was for two more 25 basis point rate cuts this year, saying, “it wouldn't mean more fifties.”
Other officials, including New York Fed President John Williams, St. Louis Fed president Alberto Musalem, and Chicago Fed president Austan Goolsbee, all have said recently they favor bringing interest rates lower “over time.”
At the September meeting, according to the minutes, officials said it’s important to communicate that lowering rates should not be interpreted to mean the Fed believes the economic outlook has soured or that the Fed will lower rates more rapidly than the path laid out.
“Some participants emphasized that reducing policy restraint too late or too little could risk unduly weakening economic activity and employment. A few participants highlighted in particular the costs and challenges of addressing such a weakening once it is fully under way,” the minutes read.
Almost all participants saw upside risks to the inflation outlook as having diminished, while downside risks to employment were seen as having increased.
While Fed officials generally viewed the job market as solid, some said that the recent pace of job increases had fallen short of what was required to keep the unemployment rate stable on a sustained basis, assuming a constant labor force participation rate.
Many said that evaluating the job market had been challenging, with increased immigration, revisions to reported payroll data, and possible changes in the underlying growth rate of productivity.
Several participants emphasized the importance of continuing to use disaggregated data or information provided by business contacts as a check on readings on labor market conditions obtained from aggregate data.
