US Inflation Data Supports Major Cut for One Fed Official, Sparks Dissent for Another According to Reuters

By Howard Schneider

WASHINGTON – In their first public remarks following the Federal Reserve’s decision to lower interest rates by half a percentage point, officials expressed differing perspectives on the necessity and implications of the move. One Fed governor indicated that weak inflation warranted a significant reduction, while another contended that ongoing price pressures suggested a smaller cut would have been more prudent.

Fed Governors Christopher Waller and Michelle Bowman, who have generally aligned in their advocacy for more aggressive rate increases to combat inflation, found themselves at odds this time. Waller conveyed in an interview that recent economic data compelled him to support a faster rate cut, concerned that the Fed could miss its inflation target. In contrast, Bowman cautioned that the substantial cut could be misinterpreted, as inflation remains above the central bank’s 2% objective.

Waller noted that the data released prior to this week’s Federal Open Market Committee (FOMC) meeting indicated that the personal consumption expenditures price index, the Fed’s favored inflation measure, was "softening much faster than I thought." This observation led him to endorse the 50-basis-point cut.

However, Bowman acknowledged that while there was a need to reduce rates due to slowed inflation, prices were still rising at approximately 2.5% year-over-year. She argued that the Committee’s decision might be perceived as an early declaration of victory over inflation.

"Moving at a measured pace toward a more neutral policy stance will ensure further progress in bringing inflation down," she explained, detailing her rationale for supporting a smaller 25-basis-point reduction.

This marked the first dissent from a member of the Fed’s Board of Governors in 19 years, underscoring ongoing uncertainties about the extent of Fed Chair Jerome Powell’s support among FOMC members for initiating a new cycle of rate cuts.

Only the voting members of the committee – consisting of seven governors and five reserve bank presidents at any given meeting – can express dissent. Economic forecasts issued alongside the policy statement indicated that many officials leaned towards a smaller cut, although it was not clear how many of those were non-voting members unable to register a dissent.

The contrasting viewpoints of Waller and Bowman, both appointed by former President Donald Trump, shed light on how incoming data can lead to different interpretations as the Fed assesses its next moves. Bowman’s emphasis on year-over-year inflation aligns with the Fed’s approach to its 2% target, and she highlighted existing economic and labor market data as largely positive.

On the other hand, Waller pointed to short-term inflation trends, which appeared to be weakening significantly, raising his concerns over potentially falling short of the Fed’s inflation target – a challenge the central bank faced for a decade prior to the COVID-19 pandemic.

During his post-meeting press conference, Powell indicated that the Fed was making decisions based on anticipated economic developments, aiming to act proactively to mitigate any potential weakening in the job market.

Waller’s statements led traders to increase their expectations for another half-percentage-point cut in November. He expressed readiness to act decisively if economic data continues to show weakness, underscoring the Fed’s commitment to maintaining its 2% inflation target.

"I was a big advocate of large rate hikes when inflation was moving much, much faster than expected," Waller remarked. "I would feel the same way on the downside to protect our credibility of maintaining a 2% inflation target. So, if the data starts coming in soft and continues to come in soft, I would be much more willing to be aggressive on cuts."