Federal Reserve More Divided Over Rate Cut Size, FOMC Minutes Reveal
The last Federal Open Market Committee (FOMC) meeting on September 18th saw bonds take a hit, while gold, stocks, and the dollar experienced a slight increase.
Market Expectations for Rate-Cuts Plunge
Despite an apparent shift towards a more dovish stance, the market's expectations for rate-cuts this year and next have dropped significantly. This development should not be surprising considering the surge in US macro data, which has consistently exceeded expectations.
Justifying further rate cuts in light of this macroeconomic backdrop would expose the political decision-making process behind The Fed's moves. The question now is, what does The Fed want us to believe they are thinking?
Fed Members More Divided Than Headlines Suggest
Despite only one dissent, the FOMC minutes suggest that members are significantly more divided than headlines have indicated. A substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points to 4-3/4 to 5 percent, given the significant progress made since the Committee first set its target range at 5-1/4 to 5-1/2 percent.
These participants generally observed that such a recalibration of monetary policy would begin to align it better with recent indicators of inflation and the labor market. They also emphasized that such a move would help sustain the economy's strength and the labor market while continuing to promote progress on inflation and reflect the balance of risks.
Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool.
However, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, with a few others indicating that they could have supported such a decision. Several participants noted that a 25 basis point reduction would align with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved.
A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction. Participants judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings.
Bottom Line
The Federal Reserve appears to be more divided over the size of the rate cut than initially thought. With the US macro data exceeding expectations, justifying further rate cuts becomes a challenge. The question now is, what do you think about this development? Do you agree with the majority of participants who supported lowering the target range for the federal funds rate, or do you side with those who preferred a more modest reduction? Share your thoughts and this article with your friends. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.
Federal Reserve More Divided Over Rate Cut Size, FOMC Minutes Reveal
The last Federal Open Market Committee (FOMC) meeting on September 18th saw bonds take a hit, while gold, stocks, and the dollar experienced a slight increase.
Market Expectations for Rate-Cuts Plunge
Despite an apparent shift towards a more dovish stance, the market's expectations for rate-cuts this year and next have dropped significantly. This development should not be surprising considering the surge in US macro data, which has consistently exceeded expectations.
Justifying further rate cuts in light of this macroeconomic backdrop would expose the political decision-making process behind The Fed's moves. The question now is, what does The Fed want us to believe they are thinking?
Fed Members More Divided Than Headlines Suggest
Despite only one dissent, the FOMC minutes suggest that members are significantly more divided than headlines have indicated. A substantial majority of participants supported lowering the target range for the federal funds rate by 50 basis points to 4-3/4 to 5 percent, given the significant progress made since the Committee first set its target range at 5-1/4 to 5-1/2 percent.
These participants generally observed that such a recalibration of monetary policy would begin to align it better with recent indicators of inflation and the labor market. They also emphasized that such a move would help sustain the economy's strength and the labor market while continuing to promote progress on inflation and reflect the balance of risks.
Some participants noted that there had been a plausible case for a 25 basis point rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2 percent while the labor market continued to cool.
However, some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, with a few others indicating that they could have supported such a decision. Several participants noted that a 25 basis point reduction would align with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved.
A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization. A few participants remarked that the overall path of policy normalization, rather than the specific amount of initial easing at this meeting, would be more important in determining the degree of policy restriction. Participants judged that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings.
Bottom Line
The Federal Reserve appears to be more divided over the size of the rate cut than initially thought. With the US macro data exceeding expectations, justifying further rate cuts becomes a challenge. The question now is, what do you think about this development? Do you agree with the majority of participants who supported lowering the target range for the federal funds rate, or do you side with those who preferred a more modest reduction? Share your thoughts and this article with your friends. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.
