While the Federal Reserve’s decision to cut interest rates by half a percentage point last month was nearly unanimous, members of the central bank’s policymaking body were divided over how much to cut rates, according to minutes of the meeting released Wednesday.
The Fed’s large cut last month marked the first time the central bank had trimmed borrowing costs since 2020, in the early days of the pandemic.
While the Fed was practically guaranteed to cut rates at that Sept. 17-18 meeting, the size of the cut was up for debate. Ultimately, officials decided that the economy was flashing enough warning signs to warrant a larger-than-usual rate cut, and publicly expressed confidence that such a large swing would help ensure that the job market doesn’t weaken any more than it already had.
However, the minutes of the discussion reflect some debate among members of the board.
In the end, only one Fed governor — Michelle Bowman — dissented from the larger cut, reasoning that “core” inflation remained above the Fed’s target rate. She also expressed concerns that the larger cut could be seen as “a premature declaration of victory” on the Fed’s mandate to achieve stable prices, according to the minutes.
Last month’s decision demonstrated how much policymakers have shifted their attention from high inflation to a slowing job market, mindful that they have fallen behind the curve before. In 2021, Fed leaders thought rising inflation would be a temporary blip in the pandemic economy — only to be proved wrong, which led them to rush to hoist interest rates at the fastest pace in decades. More recently, the Fed has feared that people could quickly lose their jobs and the unemployment rate could climb further if the Fed delays much more.
Economic data released since the Fed ratcheted down interest rates demonstrates that the labor market remains strong. The Labor Department reported Friday that U.S. employers added 254,000 jobs, and the unemployment rate ticked down to 4.1 percent in September.
Today’s employment report confirms suspicions that we are in a high neutral rate environment where responsible monetary policy requires caution in rate cutting. With the benefit of hindsight, the 50 basis point cut in September was a mistake, though not one of great consequence.…
— Lawrence H. Summers (@LHSummers) October 4, 2024
The unexpectedly strong jobs report prompted criticism of the Fed, including from former treasury secretary Larry Summers, who went on the social media platform X to pronounce the Fed’s rate cute in September a “mistake, though not one of great consequence.”
The Fed’s benchmark rate now sits between 4.75 and 5 percent. The 30-year mortgage rate is at 6.12 percent, according to Freddie Mac, down from spring highs above 7 percent.
