Federal Reserve minutes show support for slower rate cuts

A “substantial majority” of Federal Reserve officials supported the larger-than-usual half-point interest rate cut at the central bank’s September meeting but now favour a more gradual reduction of borrowing costs in the future.
Minutes from the meeting last month of the federal open market committee show supporters of the half-point cut “observed that such a recalibration of the stance of monetary policy would begin to bring it into better alignment with recent indicators of inflation and the labor market”.
The Fed lowered the benchmark policy rate to a range of 4.75 per cent to 5 per cent from the 5.25 per cent to 5.50 per cent it had maintained since July 2023. Michelle Bowman became the first Fed governor to dissent on a decision since 2005, arguing that a quarter-point cut was a better way to begin easing policy.
Other policymakers noted there had been a “plausible case” to have cut rates at the July meeting and the data since then had only buttressed the case for easier policy.
“Some” participants, however, supported only a quarter-point reduction, while “a few others indicated they could have supported such a decision.”
The minutes provided further detail on the breadth of opinion within the Federal Reserve as policymakers approved a rate cut of a size usually reserved for moments when the central bank is worried the economy is slowing fast and needs the support of looser financial conditions.
In this instance, Fed policymakers have referred to their initial cut as a “recalibration” of monetary policy to account for the fact that inflation has fallen sharply from the high levels seen in 2022 and 2023, and by some measures is near the Fed’s 2 per cent target even as the economy remains relatively strong.
“It was important to communicate,” the minutes said, that the move “not be interpreted as evidence of a less favorable economic outlook.”
Rate reductions could continue, Fed officials said at the meeting, as long as inflation continues to decline, with the pace and endpoint still open to discussion.
Incoming data would determine how policy evolved, the minutes said, while noting that if the economy behaves as expected “it would likely be appropriate to move toward a more neutral stance of policy over time”.
But in new economic projections issued after the September meeting, all but two policymakers pencilled in at least 75 basis points worth of Fed cuts this year — outlooks that were not closed off by starting with a 50 basis point reduction.
Paul Ashworth, chief North America economist at Capital Economics, said: “We expect the Fed to adopt a more measured pace of loosening — cutting rates by 25 basis points at each meeting until the target rate has fallen to 3 per cent or 3.25 per cent.”
After the release of the latest minutes, according to the closely watched FedWatch tool traders were betting on an 84 per cent of a quarter-point cut in the range, up from 65 per cent a week ago.
On Wall Street, equity markets continued to rise after the release of the Fed minutes, with the S&P 500 up 32.84 points, or 0.6 per cent, at 5,783.97 by mid-afternoon in New York, and with the Dow Jones industrial average 394.81 points, or 0.9 per cent, higher at 42,475.18. The Nasdaq was up 0.5 per cent at 18,268.58.