Fed officials debated whether a big rate cut was smart in September

WASHINGTON – Federal Reserve officials were divided over how much to lower interest rates in September, minutes from their last meeting showed, although most officials favoured the large half-point rate cut that central bankers ultimately made.

Noting that inflation was still “somewhat elevated while economic growth remained solid and unemployment remained low”, some participants observed that they would have preferred a quarter-point reduction, according to minutes from the Sept 17 and 18 gathering released Oct 9, with a few others indicating that “they could have supported such a decision”.

While one Fed governor, Ms Michelle Bowman, did vote against the Fed’s big rate cut in favour of a smaller move, the fresh minutes showed that she was not alone in her misgivings. They suggested that the merits of a smaller move were debated.

A few participants thought that a smaller move “could signal a more predictable path of economic normalisation”, the minutes showed.

The revelation that there was a spirited discussion about how much to cut rates at the Fed’s last meeting underscores what an uncertain juncture the central bank is facing. Officials are trying to calibrate policy so that it is cooling the economy enough to wrangle inflation fully, without slowing it so much that it plunges America into a recession. But that is an inexact science.

The Fed’s ultimate decision – to start off its rate-cutting campaign with a big reduction – came in response to a few economic trends. Inflation has been cooling substantially, job gains had slowed and the unemployment rate had recently moved up. Those factors suggested that it might be time to remove the Fed’s foot from the economic brakes by lowering rates decisively.

Now, though, it looks increasingly unlikely that Fed officials will make another large rate cut in 2024.

Hiring picked up in September, data released last week showed, and the unemployment rate ticked back down. When this is combined with recent evidence of solid consumer spending and healthy household balance sheets, risks of a big economic pullback now seem less pronounced.

Given the progress, Fed officials have been signalling that the economic projections they released after their September meeting are probably a good guide for the rest of 2024. These suggested that policymakers will cut rates at both their November and December meetings, but by only a quarter point each time.

The next big question facing the Fed is when it will stop shrinking its balance sheet of bond holdings. Policymakers bought bonds in massive sums during the early part of the 2020 Covid-19 pandemic, swelling their holdings. They have been shrinking their balance sheet steadily by allowing the securities to expire without reinvesting them.

Officials appear inclined to stick with that plan, at least for now, based on the minutes.

“Several participants discussed the importance of communicating that the ongoing reduction in the Federal Reserve’s balance sheet could continue for some time even as the (Federal Open Market) Committee reduced its target range for the federal funds rate,” the minutes showed. NYTIMES