Fed Policymakers Acknowledge Need for Rate Cuts, but Their Rationale Differs

By Ann Saphir and Howard Schneider

As recently as two and a half months ago, most U.S. central bankers did not anticipate an interest rate cut during their meeting on September 17-18. However, by the end of last month, when Federal Reserve Chair Jerome Powell indicated it was time to start lowering borrowing costs, nearly all of his colleagues agreed.

This shift largely stemmed from a consistent range of economic data, prompting Fed policymakers to reevaluate the risks impacting their outlook. They considered whether their primary concern should be ongoing inflation, labor market weakness, deteriorating financial conditions for businesses or households, potential policy mistakes, or a combination of these factors.

"It’s not just one factor that causes a consensus; different individuals focus on various data points, indicators, and risks, leading to a collective agreement," noted Kristin Forbes, an economics professor at MIT’s Sloan School of Management and a former member of the Bank of England’s policy-setting committee. Speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Forbes remarked that an effective Fed Chair can unify members with diverse motivations to achieve a desired outcome.

While some Fed policymakers remain cautious, tying their support for rate cuts to additional evidence of slowing inflation or labor market weakness, the majority expect an interest rate reduction this month. How substantial that reduction will be—whether a standard quarter-percentage-point cut or a larger half-percentage-point adjustment—depends on incoming information shaped by their analysis of existing data.

Fed officials have not declared victory over the highest inflation rates seen in four decades, but they perceive that price pressures, which surged earlier in 2024, are cooling. Monthly inflation rates have declined over the past three months, falling below the Fed’s 2% target on an annualized basis.

Boston Fed President Susan Collins expressed increased confidence in this downward trajectory while stating that the labor market remains healthy. However, she emphasized the challenges posed by inflation, advocating for a "gradual, methodical approach" to rate cuts.

This sentiment is echoed by Philadelphia Fed President Patrick Harker, who recently called for a "methodical" pace for rate reductions, beginning with a 25 basis point cut.

On the employment front, San Francisco Fed President Mary Daly, a labor economist, remains encouraged by the easing price pressures but notes potential downside risks to employment. While she observed no current deterioration in the labor market, she previously cautioned against allowing it to slip into a downturn, indicating that a more aggressive response would be necessary if a decline occurs.

Daly highlighted that recent labor market cooling appears to stem from slower hiring, rather than an uptick in layoffs. Richmond Fed President Thomas Barkin characterized this as a "low-hiring, low-firing mode," suggesting it is unlikely to persist indefinitely.

Fed Governor Adriana Kugler mentioned the possibility that a tipping point may have been reached, with the ratio of job openings to job seekers declining to a level that could trigger a rise in unemployment, currently at 4.3%. This concern is shared by Fed Governor Christopher Waller, who closely monitors these trends and is expected to provide insights after the release of August employment data.

Atlanta Fed President Raphael Bostic had previously indicated that he thought the central bank would need to cut rates only once this year, and not until later in the fourth quarter. However, after observing faster-than-expected declines in inflation, he has updated his stance. Bostic now supports earlier rate cuts to mitigate potential "undue damage" to the job market, influenced by feedback from business leaders in his district.

Though not all contacts were advocating for immediate action before the Fed’s last meeting, Bostic plans to continue engaging with them to understand how the economic outlook is evolving beyond what government data reflects. The latest consumer confidence surveys indicate a decline in sentiment regarding job availability, a trend historically associated with rising unemployment.

Chicago Fed President Austan Goolsbee offered another perspective for rate cuts, noting a decline in the Fed’s targeted year-over-year inflation measure from 3.3% a year ago to 2.5% in July. He contends that the growing disparity between inflation rates and the Fed’s current policy rate means that borrowing costs have become increasingly expensive in real terms. While this may be justifiable in an overheating economy, Goolsbee believes it could be excessively constrictive if that is not the case, particularly as evidence suggests the job market is cooling across various measures.