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Behind the Scenes at the Fed: Minutes Reveal Split Decision on 50 Basis Point Rate Cut

AInvestThursday, Oct 10, 2024 5:26 am ET
2min read

Despite the Federal Reserve's aggressive cut of 50 basis points last month to kick off the easing cycle, the latest released meeting minutes revealed that there was actually considerable disagreement within the Fed about this decision.

The minutes indicated that the vast majority of participants agreed to lower the federal funds rate by 50 basis points, while some also expressed that a 25 basis point cut would have been a better choice. Furthermore, some participants who publicly supported a 50 basis point cut also admitted that they could have supported a 25 basis point cut.

The minutes also showed that some officials had hoped for a rate cut in July, which was one of the factors they supported a 50 basis point cut.

In response, economists commented that the Fed's attitude is much more cautious than the market previously thought and is not in a hurry to cut rates. In the future, the Fed is expected to gradually ease monetary policy.

Oliver Allen, Senior U.S. Economist at Pantheon Macroeconomics, suggested the Fed is not in a hurry to cut rates currently. However, he also believes that the Fed does not realize how severe the economic difficulties are.

The central bank paint a slightly more cautious picture, he added.

Ryan Sweet, Chief U.S. Economist at Oxford Economics, said that the minutes increased the risk that the rate cut in 2025 might be lower than he expected. He had expected the Fed to cut rates by 25 basis points in the last two meetings of this year, followed by four 25 basis point cuts next year.

Recently, Fed officials have continued to emphasize that a 50 basis point rate cut does not mean that the pace of policy easing will be faster than the Fed's forecasts. Moreover, it is not a reaction to a deteriorating economic outlook. Some Fed officials also said that considering all the uncertainties of the economic outlook, a gradual rate cut is appropriate.

Dallas Fed President Logan said on Wednesday that further easing of financial conditions could stimulate spending and push demand beyond supply, a risk that suggests the Fed should not rush to lower the federal fund's target rate to a normal or neutral level.

Logan said that a more gradual path back to a normal policy stance will likely be appropriate from here . The difficulty in determining the neutral rate is another reason Logan advocates for gradual rate cuts. The neutral rate is the interest rate level that neither stimulates nor hinders economic growth.

Kathy Bostjancic, Chief Economist at Nationwide, an insurance and financial services company, said, We anticipate that the Fed continues to lower the fed funds rate in coming months, albeit with more modest 25-basis-point cuts.

David Rogal, Chief Portfolio Manager at BlackRock Total Return Fund, said, It's a tough call how much more easing we get this year. The range of views expressed in the minutes add to this uncertainty.

Rogal added that his base forecast is for two more 25 basis point rate cuts, but it is also possible that the Fed decides not to cut rates in November or December.

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