As long as the U.S. labor market remains stable, Federal Reserve Chairman Jerome Powell is unlikely to convince the Federal Open Market Committee (FOMC) to cut interest rates again significantly.

After the FOMC cut its benchmark interest rate by 50 basis points in September to a range of 4.75%-5%, Powell described the move at a press conference as a reset aimed at ensuring that the labor market remains strong.

The move, a break from the Fed’s typical gradualism in rate changes, was supported by some officials who said they believed recent inflation data convinced them that the rate of price changes was moving toward their 2% target.

Nonetheless, the minutes of the September FOMC meeting released early Thursday morning Beijing time showed that some officials preferred to cut interest rates at a more gradual pace. This may be because even with what Fed officials called "restrictive" policies, the U.S. economy still has significant growth potential. The resilience.

“Some participants indicated that they would prefer a 25 basis point reduction in the target range at this meeting, while others indicated that they could support such a decision,” the minutes showed.

“The tone from the hawks was, ‘If this is what you want, we’ll give it to you,’ ” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “A lot of people were looking for a 25 basis point cut at the meeting,” he said.

The minutes said a "substantial majority" supported a 50 basis point rate cut. Tang called that a "rare statement," adding that "what they can't say is that almost everyone supports it."

Powell nodded in comments made Sept. 30 at the National Association for Business Economics conference in Nashville, indicating the committee favors a gradual approach.

“This is not a committee that is in a rush to cut rates quickly,” Powell said. “This is a committee that wants to be guided, and ultimately we will be guided by the data that is coming in.”

Labor market data for September showed a sharp rebound in hiring from a slowdown in the previous three months. Employment increased by 254,000 and the unemployment rate fell to 4.1%. The Atlanta Fed's GDP tracker currently estimates that the economy grew at an annualized rate of 3.2% in the third quarter. Some Fed officials have already noted that they are currently leaning toward moving more slowly.

Nick Timiraos, the "Fed mouthpiece," said that at last month's meeting, Fed officials were divided on the question of the size of the rate cut, with the vast majority supporting the larger 50 basis point cut that was ultimately approved, but others supporting a smaller 25 basis point cut. The just-released minutes of the meeting unveiled a discussion about why officials chose to start the first rate cut since 2020 with a bolder 50 basis point. The decision to cut rates to a range of 4.75% to 5% was supported by 11 of the 12 members of the Fed's rate-setting committee. One policymaker opposed the decision and supported a smaller cut. The minutes said those who supported a larger rate cut "generally believed that this recalibration of the stance of monetary policy would begin to better align it with recent inflation and labor market indicators." Some of these officials believed that a 25 basis point rate cut was "reasonable" at the last meeting in late July, and that recent data only confirmed the case for the rate cut.

Timiraos also said that while the Fed cut rates by 50 basis points in September, the Fed typically prefers to adjust its policy rate by 25 basis points because it gives officials more time to study the effects of policy changes. In fact, the minutes showed that an unknown number of officials believed that a smaller rate cut last month (July) was justified given solid economic activity, low unemployment and inflation still above the Fed's target. The minutes said that some officials believed that a smaller rate cut "might indicate a more predictable path to policy normalization." The minutes showed that some officials who supported a larger rate cut hinted that they might also support a smaller rate cut. Before last month's meeting, some officials had said they would prefer to start with smaller adjustments and speed up once the economy looked to be weakening further.

Here are some more highlights from the Federal Reserve’s September FOMC meeting minutes:

The sharp rate cut is not a sign of concern about the economy, nor is it a signal of a rapid rate cut.

The minutes said officials agreed that the larger rate cuts adopted at the meeting should not be seen as a signal of concern about the economic outlook or that the Fed was ready to cut rates quickly. Officials who commented on the degree of restrictiveness of monetary policy believed that it was restrictive, although they held a range of different views on the degree of restrictiveness. Participants also emphasized that it was important to communicate. The importance of communication is to clearly convey that the committee's monetary policy decisions depend on the evolution of the economy and its impact on the economic outlook and the balance of risks, so this is not a preset course. In addition, some participants said that even if the committee lowered the target range for the federal funds rate, the Fed's balance sheet reduction process may continue for some time.

There are risks in cutting rates too late or too early

Some participants emphasized that reducing the restrictiveness of policy too late or too little could risk unduly weakening economic activity and employment. Some participants particularly emphasized that the costs and challenges of addressing such weakening would be greater once such weakening has fully set in. However, several participants also said that reducing the restrictiveness of policy too early or too much could cause progress in fighting inflation to stall or reverse. Some participants noted that uncertainty about the longer-run neutral level of the interest rate complicated the assessment of the degree of policy restrictiveness and believed that a gradual reduction in policy restrictions would be appropriate.

Upward risks to inflation have weakened, while downside risks to employment have increased

Participants discussed the risks and uncertainties associated with the economic outlook. Almost all participants judged that upside risks to the inflation outlook had diminished, while downside risks to employment were seen to have increased. As a result, these participants assessed that the risks to achieving the Committee's dual-mandate objectives were now roughly balanced. However, several participants also saw that the risk of a further significant weakening in labor market conditions had not increased. Several participants specifically noted upside risks to inflation associated with geopolitical developments. In addition, some participants noted that greater-than-expected accommodative financial conditions, stronger-than-expected consumption growth, or persistently strong increases in housing prices could impede progress toward the Committee's 2 percent inflation objective.

Economic activity continued to expand at a solid pace

Participants noted that U.S. economic activity continued to expand at a solid pace, highlighting the resilience of consumer spending. Several participants noted that increases in real household incomes had boosted consumption, though some noted signs of slowing spending or strain on household budgets, including rising delinquencies on credit cards and auto loans. Some participants believed that financial pressures on lower- and middle-income households could mean slower consumption growth in the period ahead. Several participants reported that their business contacts were optimistic about the economic outlook, though they were cautious about hiring and investment decisions. Participants noted that favorable aggregate supply developments, including productivity gains, had contributed to the recent solid expansion of economic activity, and several participants discussed the possible impact of the introduction of new technologies into the workplace. Many participants emphasized that they expected real GDP to grow roughly at trend over the next few years.

Labor market conditions ease

Participants noted that labor market conditions have further eased in recent months, and that after overheating in recent years, the labor market is now less tight than before the epidemic. As evidence, attendees pointed to the two jobs reports received since the July meeting showing slowing job growth, rising unemployment, declining hiring and job openings data, declining resignation and job search rates, and declining job search rates from business contacts. There are widespread reports that it is less difficult to recruit workers. Although some participants highlighted that the net unemployment rate has increased significantly since April 2023.

However, participants also noted that labor market conditions remained solid, as layoffs were limited and initial claims for unemployment benefits remained low. Many participants noted that assessments of labor market developments were challenging, with increased immigration, revisions to published wage data, and possible changes in the rate of underlying productivity growth cited as complicating factors. Looking ahead to the outlook for the labor market, participants noted that further cooling did not appear to be necessary to help return inflation to 2 percent. Some noted that as labor market conditions eased, continued easing could translate into increased risks of a more severe deterioration.

Although inflation remains elevated, its trend is consistent with a return to target levels

In discussing inflation developments, participants noted that inflation remained somewhat elevated, but nearly all agreed that recent monthly readings were consistent with a sustained retreat in inflation toward 2 percent. Some participants said that while food and energy prices had played important roles in the decline in overall inflation, the slowdown in the pace of price increases had become more pronounced across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core nonhousing services prices had declined further. Many participants also noted that inflation developments in the second and third quarters of 2024 suggested that the stronger-than-expected inflation reading in the first quarter was only a temporary interruption in the march toward 2 percent. Turning to the inflation outlook, nearly all participants said they had grown more confident that inflation would continue to move toward 2 percent.

Participants cited a variety of factors that could put continued downward pressure on inflation. These included a further modest slowdown in real GDP growth, stable inflation expectations, and softer global commodity prices. Several participants noted that nominal wage growth continued to slow, and a few noted that there were signs that nominal wage growth would decline further. In addition, several participants noted that with supply and demand in the labor market roughly balanced, wage increases were unlikely to become a source of general inflationary pressures in the near future. Participants emphasized that inflation remained somewhat elevated and that they were firmly committed to returning inflation to the 2 percent objective.

Article forwarded from: Jinshi Data