FOMC Minutes Reveal Divided Fed on Rate Cuts Amid Strong Economic Data
Since the Federal Open Market Committee (FOMC) meeting on September 18th, the bond market has experienced significant losses, while gold, stocks, and the U.S. dollar have all posted modest gains. Despite what initially seemed to be a more dovish stance from the Federal Reserve, market expectations for rate cuts—both for this year and next—have dropped sharply.
This decline in expectations should not be surprising, given that Federal Reserve Chairman Jerome Powell's rationale for significant rate cuts has weakened. U.S. macroeconomic data has consistently outperformed expectations, with growth figures and other economic indicators continuously coming in stronger than anticipated.
Given this economic backdrop, it's difficult to justify further rate reductions without risking the appearance of political motivations behind the Fed's decisions. Now, with the release of the FOMC minutes, the focus turns to what the Fed wants to communicate about its current thinking. Although there was only one dissenting vote against the recent 50 basis point cut (cast by Michelle Bowman), the minutes reveal that there is far more division among committee members than previously indicated by headlines.
According to the minutes, a substantial majority of FOMC members supported reducing the federal funds target range by 50 basis points, from 5.25% to 5.5%, down to 4.75% to 5%. The majority agreed that this adjustment was necessary to bring monetary policy more in line with recent economic data on inflation and the labor market. Many members emphasized that this policy recalibration would help sustain economic growth and strength in the labor market while continuing to push inflation toward the Fed's target of 2%. This decision was seen as a balanced approach to managing the risks to the economy.
Some committee members, however, had argued that there had already been a case for a smaller, 25 basis point rate cut at the previous meeting. In their view, the economic data that emerged between meetings provided further evidence that inflation was steadily moving toward the 2% target, and the labor market was gradually cooling. Nevertheless, these members also recognized that inflation remained somewhat elevated, economic growth was still solid, and unemployment levels were low. As a result, they expressed a preference for a more modest 25 basis point reduction at the latest meeting, with a few suggesting they would have supported such a decision.
Several members pointed out that a smaller, 25 basis point cut would align better with a more gradual path of policy normalization. This gradual approach, they argued, would give policymakers the time to assess how restrictive current policies are, especially as economic conditions continue to evolve. Some felt that such a move would also help signal a more predictable path for future policy decisions.
A few members also argued that the overall trajectory of policy normalization is more important than the size of any individual rate cut. These members believed that it was necessary to continue reducing the Federal Reserve's holdings of securities, a key part of its strategy to tighten monetary policy.
Breaking down some key topics discussed during the meeting:
Economic ConditionsParticipants emphasized the importance of communicating that policy decisions depend on evolving economic conditions and the balance of risks, rather than following a predetermined course.
Economic OutlookThe staff's economic forecast for the September meeting predicted that the economy would remain solid, although growth expectations for the second half of 2024 had been downgraded due to weaker-than-expected labor market data.
EmploymentMost participants noted that risks to employment were rising, though they acknowledged that the labor market was still relatively strong. Some pointed out that layoffs remained limited, and initial claims for unemployment insurance were low, suggesting that businesses were finding alternatives to laying off workers, such as reducing hours or slowing hiring.
InflationOn the inflation front, nearly all participants expressed increased confidence that inflation was on a sustainable path toward the 2% target. They cited several factors that were likely to keep downward pressure on inflation, including a modest slowdown in real GDP growth due to the Fed's restrictive policy, anchored inflation expectations, declining pricing power among businesses, rising productivity, and a decrease in global commodity prices.
Several participants also noted that wage growth, a key component of inflation in the services sector, was continuing to slow. They observed signs that this trend would persist, as the wage premiums received by job-switchers were declining, and wage growth in cyclically sensitive sectors had slowed. Additionally, with supply and demand in the labor market more balanced, wage increases were unlikely to drive inflation in the near future. Regarding housing prices, some participants predicted that rent increases would slow, which would further ease inflationary pressures.
However, the minutes noted that there was a diversity of opinions on how restrictive current monetary policy is. While some participants believed it was sufficiently restrictive, others expressed differing views on the degree of restrictiveness.
Wage GrowthSeveral participants remarked that wage growth was decelerating, especially for workers in sectors sensitive to economic cycles. They noted that job-switchers were no longer receiving significant wage premiums over their peers. Given that wages represent a substantial portion of business costs in the services sector, participants believed that slower wage growth would help ease inflationary pressures in that part of the economy.
Housing MarketRegarding housing services, several members suggested that the recent moderation in rent increases faced by new tenants could lead to faster disinflation in that sector. Despite the high level of home prices and rents, this trend was viewed as a positive sign for controlling inflation.
Throughout the discussion, a common theme emerged: the importance of clear communication. Several participants emphasized the need to convey that monetary policy is not on a predetermined path, but rather is contingent on incoming data and economic conditions.
In conclusion, the minutes revealed a nuanced debate within the Fed, with members weighing the need for caution in reducing policy restraint against the risks of acting too late. Despite disagreements over the size and timing of rate cuts, there was broad agreement that inflation was gradually moving in the right direction and that the labor market, while still strong, was beginning to show signs of cooling.
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