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The recent Federal Reserve meeting in September revealed a significant divide among officials regarding the decision to cut interest rates. Here’s what you need to know:
During the September gathering, Fed officials agreed on the need to reduce interest rates but were split on the magnitude of the cut. The consensus ultimately leaned towards a 50 basis point reduction, marking the first such action in over four years. This decision aimed to balance the ongoing progress in inflation with concerns about the labor market.
The minutes from the meeting highlighted that some officials preferred a more modest 25 basis point cut. They argued that a smaller reduction would allow for a gradual approach to policy normalization, giving policymakers time to assess the economy's transition. Governor Michelle Bowman was the sole dissenting vote, advocating for a quarter-point cut, which is the first time a governor has opposed an interest rate decision since 2005.
Despite the internal debate, a substantial majority of participants supported the larger 50 basis point reduction. This decision was driven by the need to maintain economic and labor market strength while continuing to address inflation. Chair Jerome Powell described this move as a "recalibration" of the Fed's policy stance, emphasizing that it should not be seen as a sign of a less favorable economic outlook or an indication of quicker policy easing.
The economic data released after the meeting reinforced the robustness of the labor market. Nonfarm payrolls rose by 254,000 in September, exceeding expectations, and the unemployment rate dropped to 4.1%. These figures suggest that while the Fed may be at the beginning of an easing cycle, subsequent rate cuts are likely to be less aggressive.
Current market forecasts indicate that the federal funds rate could end 2025 within the range of 3.25%-3.5%, aligning with the median forecast of a 3% rate. Futures markets now price in a lower likelihood of aggressive rate cuts, with about a 1-in-5 chance that the Fed will not reduce rates at its November 6-7 meeting.
The bond market has reacted differently, with yields on both the 10-year and 2-year Treasuries surging by about 40 basis points since the Fed's meeting. This reaction underscores the complex and dynamic nature of the current economic landscape.
In summary, the Fed's decision to cut rates by 50 basis points in September reflects a careful balancing act between inflation control and labor market health. As economic indicators continue to evolve, the Fed's future actions will be closely watched for signs of how they will navigate the ongoing economic challenges.
Original Article: https://www.cnbc.com/2024/10/09/fed-officials-were-divided-on-whether-to-cut-rates-by-half-a-point-in-september-minutes-show.html
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