At 02:00 a.m. Beijing time, the Federal Reserve cut interest rates by 50 basis points, lowering the federal funds rate from 5.25%-5.50% to 4.75%-5.00%, the first time since March 2020. The Fed said it decided to cut interest rates in light of progress toward its inflation target and that the risks to its two mandates were now "roughly balanced."

However, this decision was opposed by Fed Governor Bowman, who only wanted a 25 basis point rate cut. This is the first Fed Governor to vote against the Fed's interest rate decision since 2005. The other 11 Fed members voted in favor of lowering the Fed's policy rate by 50 basis points.

Dissenting votes from Fed governors were not uncommon before 1995, but the vast majority of the more than 90 dissenting votes since then have come from Fed chairmen, who typically seek consensus on decisions and sometimes reach compromises to avoid public disagreements that could undermine their credibility.

The Fed has reached consensus on interest rate decisions for 17 consecutive times. Even during the pandemic, dissenting votes are uncommon. In fact, watershed moments in Fed decision-making are sometimes marked by dissent.

In June 2022, Kansas Fed President George had advocated for a smaller rate hike, but her colleagues chose a 75 basis point increase to combat accelerating inflation. This was the first dissenting vote in four consecutive such large actions, with the other three 75 basis point rate hikes all supported by George.

James Knightley, an economist at ING Bank, said ahead of the meeting:

The presence of dissenters clearly shows that they are not suffering from “group think.” There are a lot of risks to balance, and (the dissent) shows that the Fed is having difficult discussions.

Bowman has often publicly disagreed with the majority of the Fed's board of governors on regulatory issues, and she has repeatedly called for less regulation of banks.

Bowman has also emerged as one of the Fed's most hawkish voices on monetary policy over the past year, favoring more than most other central bankers that the Fed raise its policy rate for longer to ensure inflation is fully contained. Bowman's dissent on Wednesday was the first time in nearly 30 years that a Fed governor has taken a hawkish stance -- that is, favoring tighter, rather than looser, monetary policy.

The dot plot sends a signal of interest rate cut this year

Fed officials believe they need to cut interest rates to a range of 4.25% to 4.50% by the end of the year, higher than they expected in June, as inflation approaches their 2% target and unemployment rises.

September dot plot expectations

The Fed's current federal funds rate range is 4.75%-5.00%, and the dot plot forecast means that policymakers expect to cut interest rates by 25 basis points at the last two meetings in November and December this year.

By the end of 2025, the policy rate is expected to be 3.4%, according to the median forecast of policymakers, implying another 100 basis points of rate cuts next year. The policy rate is 2.9% at the end of 2026 and the end of 2027, reflecting that the neutral interest rate that Fed policymakers now believe is approaching.

Meanwhile, the current unemployment rate, at 4.2%, is more than half a percentage point higher than when the Fed begins its 1-1/2-year rate-hike campaign in March 2022.

These forecasts represent the views of individual policymakers, not a consensus. The Fed's dot plot shows that among the 19 officials, two believe that there should be no further rate cuts in the remaining meetings in 2024, seven believe that there should be another 25 basis point cut in 2024, nine believe that there should be another 50 basis point cut in 2024, and one believes that there should be another 75 basis point cut in 2024.

Federal Reserve's September economic forecast

The article is forwarded from: Jinshi Data