According to the latest minutes of the Federal Reserve meeting, Nick Timiraos, the "Fed mouthpiece", pointed out that although the Federal Reserve cut interest rates by 50 basis points in September, some officials prefer a more cautious and small rate cut. This is because a smaller adjustment provides officials with more time to evaluate policy effects and leave room for future policy adjustments.
The minutes showed that some officials believed that last month's smaller rate cut was reasonable, given the solid economic activity, low unemployment and still high inflation. They pointed out that a quarter-point rate cut could indicate a more predictable policy path. However, although some officials preferred a small rate cut, the vast majority of officials ultimately supported a 50 basis point rate cut as a better way to align with the current economic situation.
At the September 17-18 meeting, 11 of the 12 rate-setting members supported a 50 basis point rate cut, with only one member opposing it, believing that a 25 basis point cut would be more appropriate. Officials who supported a substantial rate cut believed that such an adjustment in monetary policy would better reflect recent changes in inflation and the labor market. Although there was a reasonable reason for a 25 basis point rate cut at the July meeting, the latest data further confirmed the need for a rate cut.
Inflation trends and the labor market
In the discussion on inflation, almost all participants agreed that although inflation remains above target, the latest monthly data show that inflation is gradually falling back to the Fed's 2% target. Some participants pointed out that the decline in food and energy prices played a key role in the slowdown in overall inflation, and the price increases of core goods and non-housing services also eased. These factors suggest that early inflationary pressures are easing, especially the inflation data in the second and third quarters of 2024 support this view.
Participants also mentioned that various factors may continue to exert downward pressure on inflation, including slowing real GDP growth, stable inflation expectations, and falling global commodity prices. In addition, the slowdown in nominal wage growth further suggests that inflation may continue to decline. Nevertheless, many participants emphasized that inflation remains high and the Federal Reserve will continue to be committed to keeping inflation at the target level of 2%.
Changes in the labor market
The minutes showed that tight labor market conditions have eased recently. Since July, job growth has slowed, the unemployment rate has risen, and job vacancies and job seekers have also fallen, indicating that the labor market is no longer overheated. At the same time, companies have found it easier to recruit, layoffs remain low, and initial unemployment claims remain low.
However, some participants stressed that assessing changes in the labor market is challenging. Increased immigration, revisions to wage data, and changes in potential productivity are all complex considerations. Looking ahead, some officials pointed out that the cooling of the labor market does not need to be excessive, and continued loose monetary policy may increase the risk of economic deterioration.
Overall, the Fed's decision to cut interest rates in September showed internal differences of opinion, with some officials supporting a smaller adjustment, while the final 50 basis point rate cut reflected the Fed's desire to respond quickly to changes in inflation and the labor market. The future policy path will depend on the performance of subsequent economic data.
