Fed officials were at loggerheads over rate cuts during their October meeting, splitting over whether a stalled labor market or stubborn inflation posed a greater economic threat, according to minutes released Wednesday.
The Federal Open Market Committee approved the rate cut at its meeting, but the path forward is less clear. The disagreement extended to the December outlook, with officials expressing skepticism about the need for further cuts that were widely expected by markets, with “many” saying no further cuts would be needed until at least 2025.
“Several participants assessed that if the economy progresses broadly as expected over the coming session, further lowering the target range for the federal funds rate in December may be entirely appropriate,” the meeting minutes said. “Many participants suggested that it was likely appropriate to leave the target range unchanged for the rest of the year based on the economic outlook.”
In Fed parlance, “many” is more than “some,” indicating a tilt toward a rate cut in December. However, “participants” does not refer to voters. There are 19 participants in the meeting, but only 12 can vote, and it is unclear how voting members feel about December’s decision.
However, this notation is inconsistent with a statement made by Federal Reserve Chairman Jerome Powell at a post-meeting press conference. Chairman Powell told reporters that a December rate cut was not a “foregone conclusion.”
“While discussing the near-term direction of monetary policy, participants expressed widely differing views on what policy decisions were likely to be most appropriate at the December committee meeting,” the minutes said.
Before Powell’s statement, traders were almost certainly pricing in a new move in the December 9-10 session. As of Wednesday afternoon, that probability had fallen to about one-third, according to CME Group’s FedWatch futures price metric. The probability of a January interest rate cut is about 66%.
The minutes said “most participants” saw further cuts likely in the future, but noted that it would not necessarily happen in December.
Ultimately, the FOMC approved a quarter-point reduction in the overnight borrowing rate to a range of 3.75% to 4%. But the 10-2 vote did not indicate how divided officials were at an agency generally not known for opposing views.
Officials generally expressed concern about a slowing labor market and inflation that shows “little sign of a sustained return to the Fed’s 2% target.” The minutes reflected the opinions of multiple factions within the committee.
“Against this background, many participants at this meeting supported lowering the target range for the federal funds rate; some supported such a decision but could also support maintaining the target range; and several opposed lowering the target range,” the minutes said.
The debate centered on disagreements over how “restrictive” current policies are for the economy. Some participants believed that even a quarter-point cut would still constrain growth, while others believed that the “resilience of economic activity” indicated that the policy was not restrictive.
Judging from published statements, the committee is divided between those who support inflation, including Governors Stephen Millan, Christopher Waller and Michelle Bowman, and those who favor cuts as a way to stem the downturn in the labor market. Meanwhile, regional governors such as Jeffrey Schmidt of Kansas City, Susan Collins of Boston and Alberto Moussallem of St. Louis are among the more hawkish members, worried that further rate cuts could derail the Fed’s 2% inflation target.
In between are moderates such as Mr. Powell, Vice Chairman Philip Jefferson and New York President John Williams, who favor a patient approach.
The minutes said “one of the participants”, referring to Milan, wanted a more aggressive half-point cut. Mr. Schmidt also voted against the measure, saying he would prefer no cuts at all.
Minutes revealed that government data was lacking during the 44-day federal government shutdown, complicating decision-making. Reports on the labor market, inflation, and many other indicators were not compiled or made public during the impasse. Government agencies such as the Bureau of Labor Statistics and the Bureau of Economic Analysis have announced schedules for some, but not all, releases.
Powell likened the situation to “driving in fog,” but Waller on Monday rejected that analogy and said the Fed has enough data to formulate policy.
The balance sheet aspects of policy were also discussed in the minutes. Although the FOMC agreed in December to halt cuts in U.S. Treasuries and mortgage-backed securities, the process removed more than $2.5 trillion from the balance sheet, which remains at about $6.6 trillion. There appears to be widespread support for halting the process known as quantitative tightening.
