MNI POLICY: Fed To Scale Back To 25BP As US Outlook Stays Rosy

MNI (WASHINGTON) - Federal Reserve officials plan to scale back rate cuts to 25-basis-point increments and could even hold at some meetings as the U.S. economy continues to show surprising strength and after the latest employment report dissipated fears of a Fed-induced job market rut. 

That would mean the aggressive half point start to the rate-cutting cycle appears to have been a one-off for now barring significant and unexpected deterioration in the labor market. Skipping meetings would be up for debate if data keep coming in hot. 

Officials who have spoken since the September meeting have emphasized the need to be gradual amid uncertainty about how far the rate-cutting cycle will go, in part because they disagree over how much the neutral rate has risen since Covid.  

A somewhat stronger-than-expected September CPI report also reinforced the central bank’s tendency toward treading cautiously from here on. Core services prices – both housing and non-housing – have been particularly slow to normalize.  

SPLIT FOMC

Indeed, Fed Chair Jerome Powell had a harder time getting consensus for the jumbo cut than widely assumed, according to minutes from the September meeting this week. The account said some officials would have preferred a 25-basis-point cut and a few others could have supported such a decision. 

That’s quite a bit more opposition than first indicated by Governor Michelle Bowman’s lone dissent among the 12 of 19 FOMC members who get a vote at any given meeting. 

What’s more, even the “substantial majority” that did support the 50 basis points went out of its way to signal they were not setting a pace for future cuts. 

“Participants emphasized that it was important to communicate that the recalibration of the stance of policy at this meeting should not be interpreted as evidence of a less favorable economic outlook or as a signal that the pace of policy easing would be more rapid than participants' assessments of the appropriate path,” the minutes said. 

AFTER THE RECALIBRATION

San Francisco Fed President Mary Daly echoed that sentiment Wednesday, saying that while the baseline for the September Summary of Economic Projections was for two more quarter-point cuts this year, she could see the Fed doing one or two more depending on the data. 

“The 50-basis-point adjustment is simply a recalibration. It doesn't tell you anything about the pace or magnitude of further adjustments,” Daly said.  

Sizable upward revisions to data on jobs, immigration, gross domestic income and the savings rate have made it increasingly difficult to judge the economy, adding to the case for caution. Not only was the 254,000 gain in new jobs in September the largest in six months, weak readings for the prior couple months that had tilted the Fed toward 50 basis points with were revised higher. Hurricane effects are also likely to muddy the picture in the next couple of months. (See MNI: Job Boom Means Slower Fed Cuts, Pause Possible-Ex-Staff)

A gradual approach to interest rate cuts would be in line with the view delineated by Philadelphia Fed President Patrick Harker in an interview with MNI this summer. (See MNI INTERVIEW: Fed's Harker Ready To Start 'Methodical' Cuts)