Federal Reserve officials at their September meeting were divided over how aggressively to cut interest rates, according to minutes released on Wednesday.
While the Federal Open Market Committee (FOMC) ultimately agreed on a 50-basis point reduction, the first of its kind in over four years, several members preferred a more cautious approach with a smaller 25-basis point cut.
The decision to implement the larger half-point cut reflects concerns over inflation, balanced against optimism regarding the labour market.
However, some participants expressed misgivings, arguing that a smaller cut would allow for a more gradual path to policy normalisation.
The minutes revealed that "a substantial majority" favoured the 50-basis point move, though the debate highlighted ongoing uncertainty about the economic outlook.
While most members supported the more aggressive cut, Governor Michelle Bowman was the only FOMC member to formally dissent, preferring a 25-basis point reduction.
The minutes noted that others shared her concerns but ultimately sided with the majority.
This marked a rare instance of a dissenting vote from a Fed governor, the first since 2005.
Several members argued that a smaller cut would better align with the Fed's usual policy approach, offering more time to assess the economy’s response.
According to the minutes, "a few participants" believed a 25-basis point move would signal a more predictable and cautious approach to policy easing.
Since the September meeting, economic indicators have suggested that the labour market is stronger than anticipated. Nonfarm payrolls surged by 254,000, and the unemployment rate fell to 4.1%, exceeding expectations.
This data has solidified market expectations that future rate cuts may not be as aggressive as the September move, with the Fed likely entering the early stages of an easing cycle.
Chair Jerome Powell and other officials have signaled that an additional 50-basis points in cuts could occur by the end of 2024, aligning with projections outlined in the Fed’s post-meeting “dot plot.”
However, Powell has also emphasised the importance of recalibrating policy in response to evolving economic conditions.
The minutes showed that the decision to approve the 50-basis point cut was made "in light of progress on inflation and the balance of risks" facing the labour market.
However, the document offered little explanation of why the larger move gained majority support, beyond the desire to maintain economic momentum while addressing inflation.
Fed officials have maintained that the rate cut should not be interpreted as a sign of pessimism about the economy’s trajectory.
Instead, the "recalibration" is intended to bring policy in line with recent indicators of inflation and the labour market, and to support the broader goal of sustaining economic growth.
Market response to the release of the minutes was muted, with major indexes continuing their upward trend.
Futures markets now indicate that the federal funds rate could end 2025 between 3.25% and 3.5%, aligning with the Fed’s median projection of 3.4%.
There remains, however, a 20% chance that the Fed might not cut rates at its next meeting in November.
Meanwhile, bond markets have reacted differently, with yields on both the 10-year and 2-year US Treasuries surging by 40 basis points since the September meeting, reflecting broader uncertainty about the future path of Fed policy.