FOMC Minutes: Majority Backs Jumbo Cut, But Some Favor More Cautious Approach

The Federal Reserve released minutes from its latest policy meeting on Wednesday, revealing a nuanced approach to monetary policy as the central bank navigates a complex economic landscape. While a majority of policymakers supported a 50 basis points (bps) reduction in the federal funds rate, the minutes also highlighted a growing consensus among members that future cuts are likely to be more gradual.

Chairman Jerome Powell and other Fed officials have signaled that the expected 50 basis points in reductions by the end of 2024, as indicated by the “dot plot” unofficial forecast, is likely to be the extent of aggressive cuts. This suggests that the Fed is balancing the need to support economic growth with the ongoing task of reducing inflation.

The minutes noted that the decision to approve the 50 basis point cut was made “in light of the progress on inflation and the balance of risks” against the labor market. While a “substantial majority of participants” favored the larger move, the exact number of dissenting votes was not disclosed.

Some members had previously advocated for a rate cut at the July meeting, which did not materialize. The minutes provided more details on the debate surrounding the 25 basis point cut but offered less information on the reasons for supporting the larger move.

Chairman Powell described the decision to cut as a “recalibration” of policy, a term also used in the minutes. Supporters of the 50 basis point cut emphasized that it would help sustain economic and labor market strength while continuing to promote progress on inflation.

The Fed’s preference for quarter-point increments in rate cuts has been a longstanding practice, with larger moves typically reserved for times of crisis, such as the Covid pandemic and the 2008 financial crisis.

Market expectations for the fed funds rate at the end of 2025 have shifted slightly since the Fed meeting. The CME Group’s FedWatch now indicates a median projection of 3.4%, which is in line with the market’s pricing of a 3.25%-3.5% range. Additionally, there is now a 1-in-5 chance that the Fed may not cut rates at its upcoming meeting on November 6-7.

The bond market has reacted differently to the Fed’s actions. Since the meeting, both the 10- and 2-year Treasury yields have surged by approximately 40 basis points, suggesting that investors may be reevaluating their expectations for future economic conditions and interest rate policy.

Overall, the Fed’s approach to monetary policy appears to be cautious and data-dependent. While the central bank is committed to supporting economic growth, it is also mindful of the risks associated with excessive inflation. As the economic landscape continues to evolve, the Fed will likely need to adjust its policy stance accordingly to maintain a balanced approach.