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  • Fed Minutes Show Pushback on Powell's 50 Bps Rate Cut

Fed Minutes Show Pushback on Powell's 50 Bps Rate Cut

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Bloomberg Oct 9 20:00 · 27.9k Views

Federal Reserve Chair Jerome Powell received some pushback on a half-point interest-rate cut in September, as some officials preferred a smaller, quarter-point cut.

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Transcript

  • 00:00 Well, the minutes show a divided Fed that eventually came together on a larger than expected rate cut.
  • 00:06 While a substantial majority supported A50 basis point cut in the benchmark lending rate,
  • 00:12 some participants preferred 1/4 point reduction
  • 00:16 and a few others indicated they could have supported such a decision.
  • 00:21 Several noted a 25 basis point move would allow the
  • 00:24 time to see the effects of a rate cut on the economy.
  • 00:28 And if you argued that it would
  • 00:30 a more predictable path for policy,
  • 00:33 there were a range of views, the minute say about how restrictive the Fed actually was.
  • 00:39 Almost all agreed upside risks to inflation had diminished
  • 00:44 and most felt downside risks to employment had increased.
  • 00:48 A couple did not see an increased risk of significant further labor market weakening.
  • 00:54 Several, however, cited risks of sharper than expected slowing in
  • 00:58 consumer spending
  • 01:00 should hiring slow.
  • 01:01 The vast majority,
  • 01:03 however,
  • 01:04 did not see
  • 01:05 did see inflation risks as broadly balanced.
  • 01:09 There was agreement
  • 01:10 that there that it was important to communicate that the recalibration of the stance of policy at this meeting
  • 01:16 should not be interpreted as evidence of a less favorable economic outlook
  • 01:21 or as a signal the pace of policy easing would be more rapid.
  • 01:25 Several also
  • 01:27 stressed the importance of communicating the ongoing reduction in the balance sheet
  • 01:31 would continue for some time
  • 01:33 even
  • 01:34 as they cut rates.
  • 01:35 Matt, Kate.
  • 01:37 And so we knew that there was going to be division.
  • 01:39 Of course, we had to dissent at the latest meeting.
  • 01:42 So
  • 01:42 interesting to see that sort of solidified in these these minutes.
  • 01:46 Taking a look at some of the
  • 01:48 headlines here.
  • 01:49 Of course, as we knew some officials would have preferred a smaller rate cut, but most officials thought that risks of higher inflation
  • 01:56 had diminished.
  • 01:58 That was really the thesis of the markets to the consensus in the markets.
  • 02:02 We did see a little hiccup when it came to the average hourly earnings growth that we got last Friday.
  • 02:07 We have a big CPI report coming up tomorrow, Mike.
  • 02:10 I mean, what is the setup heading into 830 AM Eastern?
  • 02:15 Well, at least if you go by the minutes,
  • 02:18 most members are thinking that the inflation rate should continue to fall and that
  • 02:23 the risks that it would rise again had diminished.
  • 02:26 That's basically what's being called for tomorrow,
  • 02:29 1/10 of a point reduction in both the
  • 02:31 headline and the core.
  • 02:33 And if that's the case, basically, it's something of a permission slip for the Fed to focus
  • 02:37 unemployment and making its next decisions.
  • 02:40 And the risks at the time of the meeting, of course,
  • 02:44 were tilted towards the employment, towards labor markets.
  • 02:47 Of
  • 02:48 course, then we got last Friday the big jobs report.
  • 02:51 So it'd be interesting to see how or whether anybody had changed their minds about the risks.
  • 02:57 Given that.
  • 02:59 Can we glean, Mike, from these minutes?
  • 03:03 What the Fed
  • 03:04 might want to do, What some might want to do, or several, a few, couple, perhaps the vast majority after we've seen these
  • 03:12 updated jobs numbers better than any economists in our survey had expected with revisions higher for the last two months.
  • 03:22 Well, you really can't take any future forecasts out of these minutes because of the fact that
  • 03:27 we did get that big jobs report.
  • 03:28 And we do see
  • 03:30 strength, ongoing strength in the economy.
  • 03:32 The GDP down number from the Atlanta Fed,
  • 03:34 3.2% as of today for the third quarter.
  • 03:38 And if that's the case, then it was suggested if the economy is still growing strong and the neutral rate has moved up,
  • 03:45 they would want to do 25 basis points at a time
  • 03:48 as opposed to 50 basis points.
  • 03:50 There was no talk that they would suspend
  • 03:53 cutting interest rates.
  • 03:54 But at the time, of course, they hadn't seen these strong numbers.
  • 03:57 So it's going to be an open question.
  • 03:59 We'll have to listen to Fed officials as they speak between
  • 04:02 now and November
  • 04:04 and see if any of the numbers start to change their views,
  • 04:08 whether they should be cutting.
  • 04:09 But if they do cut,
  • 04:11 it does seem that most will be favoring going forward.
  • 04:13 25
  • 04:14 Yeah.
  • 04:15 Let's talk about, of course, that November Fed meeting.
  • 04:17 We had a great conversation on open interest
  • 04:20 with Esther George, of course, former Kansas City Fed
  • 04:24 member there.
  • 04:25 And I know that you've spoken to her about what the neutral rate is.
  • 04:28 She thinks it should be slightly higher.
  • 04:30 We also got into
  • 04:32 a line of discussion about whether or not this could be a stop and start rate cutting cycle, whether or not we actually could see the Fed not move at all in November.
  • 04:42 I mean, Mike, what do you make of that?
  • 04:45 Well, I think you would have to see a rise in inflation, something that would catch people's attention or another extremely strong jobs report, But
  • 04:54 that's not likely
  • 04:56 given what we're seeing with the Hurricanes, the
  • 04:59 damage to.
  • 05:00 To the labor market,
  • 05:01 according to back of the envelope calculations by JP Morgan Chase is that we could see about 120,000 jobs
  • 05:07 taken away just because of Hurricane Helene.
  • 05:10 We haven't even had Milton hit
  • 05:12 land yet.
  • 05:13 And then of course you got 38,000 Boeing workers on strike.
  • 05:15 So put those two together and you would have
  • 05:18 had a negative print
  • 05:19 had we come in at the level that had been forecast for September.
  • 05:24 So you've got a danger of
  • 05:27 really low or negative number for the month of October.
  • 05:30 Now
  • 05:31 the Fed would look through that, but
  • 05:33 with the American public, how would how would that play?
  • 05:36 Two days after the election is going to be a lot for Fed officials to think about.
  • 05:40 We are getting inflation numbers tomorrow.
  • 05:42 The
  • 05:42 consumer price index, which is not the Fed's preferred gauge, but does still
  • 05:48 have a wide following in the markets, We're expecting, I think, 3.2%
  • 05:53 at the core, 2.3% for the headline number.
  • 05:58 What what will drive this number, Mike, tomorrow?
  • 06:00 What are the pieces that you're going to be pulling out of it as we get the report?
  • 06:05 Well, generally what we have seen is an ongoing reduction in energy prices.
  • 06:09 And even though oil prices have gone up over concerns of the Middle East, we haven't seen that reflected in gasoline prices yet.
  • 06:16 So and of course,
  • 06:17 the Middle East has only gotten worse since October began.
  • 06:20 So it's probably going to be energy that is one of the biggest contributors to the downside.
  • 06:26 But we've also seen weakness in airfares and hotels and things like that as we get into
  • 06:32 the school year and a lot of travel sort of falls off used cars, new car prices have been going down.
  • 06:39 That may continue as well.
  • 06:40 But in general,
  • 06:41 what we saw the last time was a sort of broad
  • 06:45 decline in prices.
  • 06:46 And that gave
  • 06:47 even more hope to Fed officials as they looked at the
  • 06:50 inflation numbers,
  • 06:52 that they were on the right track.