Fed’s Significant Rate Cut Might Have Been a Narrower Decision Than One Dissent Indicates

WASHINGTON (Reuters) – The recent significant decision by the Federal Reserve to initiate a series of interest rate cuts this year and next appears to have been backed by only a narrow majority among the 19 policymakers, based on their rate-path projections.

This assessment suggests that the lone formal dissent, expressed by Fed Governor Michelle Bowman, does not fully capture the level of dissent within the group. Analysts indicate that as many as nine policymakers may have voiced concerns or only reluctantly supported the decision.

A complete summary of the meeting will not be available for three weeks, when the Fed releases the minutes from its September 17-18 session, during which the policy rate was reduced by half a percentage point to a range of 4.75% to 5.00%. Many analysts had predicted a more modest quarter-point cut.

Indicators already suggest this decision was different from that of the previous meeting in July, where Fed Chair Jerome Powell stated that "all 19" members were in favor of maintaining the policy rate. Following the recent meeting, Powell noted in his press conference that discussions had included a lot of back-and-forth and that there was “good diversity” of thought among participants, though he also mentioned broad support for the decision.

In Bowman’s dissent—marking the first from a Fed governor in nearly two decades—she highlighted her position for maintaining tighter policies. Additional clues to the divided sentiment include projections from seven central bankers expecting a year-end policy rate in the range of 4.5% to 4.75%, implying anticipation of only one more quarter-point rate cut among the Fed’s remaining meetings this year. Two members even signaled they expect no changes for the rest of the year.

These projections could reflect views from those who reluctantly agreed to a larger cut with hopes for a subsequent pause. However, analysts believe this indicates that several policymakers, not only Bowman, may have preferred a smaller cut this week.

The decision to implement a more aggressive rate cut could allow the central bank the flexibility to continue with rapid cuts beyond what many policymakers currently appear to endorse. Economists at Goldman Sachs noted that leadership may have influenced the decision for a larger cut, leading them to revise their outlook in favor of consecutive quarter-point reductions at each of the Fed’s next meetings through June.

Tim Duy from SGH Macro Advisors predicts the Fed will need to undertake another half-point cut before year-end to support the economy, even as he notes that many policymakers do not yet see the labor market weakening enough to warrant such a reduction.

Duy pointed out that many members "supported a 50-basis-point cut only reluctantly," highlighting the close divide in the "dot plot" between those who expect one more rate cut and those anticipating two. He remarked that while Powell successfully garnered support for the larger cut, it seemed to come at the cost of a relaxed stance on job market risks, as Powell did not emphasize potential labor market dangers during his press conference. In their policy statement, the Fed described the risks to employment and inflation goals as being "roughly in balance."

Economists at Deutsche Bank also acknowledged the divisions evident in the "dot plot" and Powell’s characterization of internal support as "broad." They interpret this as reinforcing the notion that the decision was a closely contested one.