US Fed officials were divided over size of initial rate cut, minutes show

Federal Reserve bankers now back to gradual easing after delivering major rate cut in September

Federal Reserve chairman Jerome Powell. Reuters

Federal Reserve officials revealed the division and uncertainty over the size of last month's decision to cut US interest rates by 50 basis points, as members' attention swings from inflation to the labour market, minutes released on Wednesday showed.

All participants agreed that a rate cut was necessary, but they entered the two-day meeting uncertain of which way to go: a more traditional quarter-point cut, or a half-point cut.

While Federal Reserve Governor Michelle Bowman was the only member to dissent – and the first Fed governor to dissent on a policy decision since 2005 – the minutes showed other members also considered the smaller rate cut to be the more prudent measure.

“Noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred a 25-basis-point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision,” the minutes showed.

“Several participants noted that a 25-basis-point reduction would be in line with a gradual path of policy normalisation that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25-basis-point move could signal a more predictable path of policy normalisation.

“Some participants also made the argument that the overall messaging on the path towards normalisation would be more important than the initial rate-cut delivery. Fed chair Jerome Powell sought to strike a pre-emptive blow against market expectations during the post-meeting news conference.”

Mr Powell said then: “I do not think that anyone should look at this and say, 'Oh, this is the new pace'.”

Calling the turnaround a “recalibration”, Mr Powell and his colleagues have said their attention is fixed on protecting the labour market now that the inflation battle is largely seen as over. By cutting interest rates now, Fed officials hope to keep inflation down without a sharp rise in unemployment or sudden downturn in economic growth.

“In discussing risk-management considerations that could bear on the outlook for monetary policy, almost all participants agreed that the upside risks to inflation had diminished, and most remarked that the downside risks to employment had increased,” the minutes read.

Projections released in September showed that the median for Fed officials' expectations is for the target range to end the year at 4.25 to 4.50 per cent – “a total of [50 basis points] more”, Mr Powell said at the National Association for Business Economics conference in Nashville, Tennessee, last month.

Markets expectations have largely moved in line with the Fed projections after recent economic data. Last week's jobs report came in higher than anticipated with 254,000 added last month, while the unemployment rate dipped to 4.1 per cent, highlighting the continuing strength of the labour market and playing down expectations of another half-point cut during the November meeting.