Fed to Cut Another Quarter Point Again, But Ready to Pause Thereafter, Prophet Says
3min read The Federal Reserve's final monetary policy meeting of the year will take place this Tuesday, with the interest rate decision to be announced on Wednesday.
Investors widely expect a third rate cut this week. Following this, officials are prepared to slow down or even halt rate cuts, according to the Wall Street Journal's chief economics correspondent.
Nick Timiraos, who has almost accurately predicted every Fed move since 2022, stated that the Fed will choose to cut rates by 25 basis points on Wednesday and then use new economic forecasts to strongly suggest that the central bank is ready to slow the pace of rate cuts.
Facing internal dissent, Powell must strike a balance in policy adjustments. Since late summer, the frequency and magnitude of rate cuts have raised concerns among some Fed officials, who worry that cutting rates too quickly could send the wrong signal to the market.
Jon Faust, who once served as a senior advisor to Fed Chair Powell, noted that the Fed's current monetary policy is at a crossroads, where it could either cut rates or choose to stay put. Officials' overall judgment on future rate trends may be more influential than the specific decision at the next meeting.
Balancing Between Going Too Far and Not Going Far Enough
Timiraos pointed out that there is internal disagreement within the Fed about continuing rate cuts. Some hawkish officials are concerned that cutting rates too soon could keep inflation high and damage the Fed's credibility. Additionally, some policies introduced after Trump took office could drive up inflation.
The performance of speculative assets like the stock market and Bitcoin worries hawkish officials. Fed Governor Michelle W. Bowman remarked in a speech this month:
It's hard to think that the level of interest rates is restrictive at this point, given how the economy is performing, she said.
Meanwhile, dovish officials are concerned about slowing economic growth and believe rate cuts are necessary to stimulate the economy. They argue that the Fed's substantial rate hikes over the past two years now require careful assessment of the risks associated with rate cuts.
Powell believes it is crucial to prevent both excessive inflation and sluggish economic growth. He emphasized that the Fed needs to find a balance between going too far and not going far enough:
We're mindful of the risk that we go too far, too fast — but also of the risk that we don't go far enough, he said. It seems like we're right where we need to be.
Timiraos noted that the U.S. labor market is currently in a delicate state, with both hiring and layoff rates at low levels. Economic growth is relatively stable, but the unemployment rate has risen. Interest rate-sensitive sectors, such as housing, have yet to fully benefit from rate cuts.
Powell needs to work hard to reach a consensus within the 18-member committee. Despite the easing inflation situation, there are still disagreements within the committee regarding the direction of rate policy.
At the beginning of 2023, some originally hawkish officials began to change their stance, gradually accepting more moderate inflation reports. Fed Governor Waller once boldly proposed six rate cuts of 25 basis points each in 2024, becoming one of the most aggressive proponents of rate cuts. However, as inflation stagnated in the spring, Waller's view changed, and he began to support maintaining rates.
Ahead of the September meeting, Fed officials signaled a preference for small rate cuts through public speeches. However, in a closed-door meeting, Powell and his advisory team made a surprising decision to cut rates by 50 basis points.
Timiraos pointed out that this decision drew on former Chairman Greenspan's risk management strategy. Considering the economic outlook and the possibility of multiple future rate cuts, policymakers believed the risk of a substantial rate cut was relatively low.
This decision was not unanimous. Bowman cast a dissenting vote, marking the first time since 2005 that a governor opposed a Fed monetary policy decision. To quell internal disputes, Powell emphasized in subsequent public remarks that the 50 basis point rate cut was not a new pace and that decisions would be made cautiously at each meeting.
Subsequent economic data showed that the resilience of the U.S. economy exceeded expectations. Income growth and personal savings rates were higher than initially estimated, alleviating concerns about a recession. This indicated that the Fed's substantial rate cut might have been too aggressive.
Waller initially supported smaller rate cuts but was eventually persuaded. He later admitted that the decision was akin to buying insurance—wise to prepare in advance even if it is ultimately unnecessary.
To conclude, the Fed's rate cut decision process this time was filled with complexity and uncertainty. Internal committee disagreements, constantly changing economic data, and policymakers' risk assessments all significantly influenced the final policy direction.
