Fed approval of a half percentage point cut in interest rates in September was not easy to obtain
The meeting of the North American Federal Reserve (Fed) ended on September 18th ended up approving, with just one vote against, a first cut of half a percentage point (50 basis points), but the minutes released this Wednesday reveal that In the discussion, a group of several central bankers spoke in favor of a smaller reduction, of just 25 basis points.
At that meeting, the defense of a more modest first cut was much broader than the single final vote against by Michelle W. Bowman, a member of the Fed’s board of seven governors, chaired by Jerome Powell. It was the first time since December 2005 that a decision was made with a vote against.
The minutes state that “some [participantes na reunião] preferred a 25 basis point cut” and that “some others indicated they might support such a decision”. This group argued that a more “gradual” monetary policy normalization process was preferable, which would allow central bankers more time to better assess the degree of restrictiveness depending on the evolution of the North American economy.
However, a “substantial majority” of participants at the meeting ended up supporting a more robust first cut and, in the final vote, there was only one vote against among the 12 members of the Monetary Policy Committee (Federal Open Market Committee, FOMC) chaired by Powell.
In the decision taken, central bankers express the perspective of moving towards a “neutral” monetary policy (neither restrictive nor expansionary) if future economic data evolves in the expected direction of the inflation path towards 2%.
The minutes also reveal that “some participants” had argued at the previous meeting in July that it would then be plausible to have brought forward a first interest rate cut of 25 basis points.
The minutes do not provide any guidance for decisions at future meetings.
Remember that the Fed lowered interest rates from the range between 5.25%-5.5% where they had been since July 2023 to 4.75%-5%. This was the first cut since March 2020.
North American economy is doing well
The decision taken in September was based on some pessimism about the evolution of the labor market, which would not later be verified.
Despite the catastrophism spread by Donald Trump’s candidacy regarding the situation of the United States economy, the Bureau of Economic Analysis confirmed that GDP grew 3% in the second quarter of this year in real terms and the Bureau of Labor Statistics advanced, on October 4 , that employment in September had increased by 254 thousand jobs in the non-agricultural sector, a significant increase in relation to the 159 thousand created in August and almost triple the 89 thousand created in July.
The Federal Reserve Bank of Atlanta’s GDPNow model points to growth of 3.2% in the third quarter, according to the forecast released on October 8. The official number will only be published at the end of October. If the trajectory is confirmed in 2024, the largest economy in the world accelerated from 1.6% in the first three months of the year to more than 3% in the following six months.
Inflation fell to 2.2% in August, according to the indicator monitored by the Fed. The estimate for September will only be released on October 30th. This inflation indicator is technically called the Personal Consumption Expenditure Price Index (PCE, in the acronym), Price Index for Personal Consumption Spending, and is considered more representative of the real behavior of consumers, which is why it is preferred by the central bank. The other indicator, the Consumer Price Index (CPI) measures price variations in a basket of goods and services consumed in urban areas. The latter dropped to 2.5% in August and the September variation is only published on October 10th.
Investors adjust expectations for less robust cuts
The good growth, employment and disinflation (decrease in inflation) numbers indicate that the Fed may slow down the rate of interest cuts that began on September 18th with a half percentage point drop in the key rate.
Investors have already adjusted their expectations for a drop in interest rates by the end of the year and the CME’s FedWatch tool, based on the Fed’s policy rate futures, points to a probability of more than 80% for a cut of 25 basis points a year. November 7th, at the next meeting. For the last meeting of the year, there is a 76% probability for a new cut of 25 basis points. The expectation of a second robust cut of half a percentage point lost steam and the probability of the Fed maintaining the rate at the next meeting in November rose from 0% on October 2nd to 21% this Wednesday. According to FedWatch probabilities, the Fed’s key rate range will decrease from the current 4.75% to 5% to 4.25% to 4.5% by the end of the year.
Due to this adjustment to smaller cuts, the New York stock exchanges have been trading in zigzags with sessions of gains and losses since October 1st. As of the close of October 8, the MSCI index for the United States (covering both exchanges, the New York Stock Exchange and the Nasdaq) is still in negative territory, with a loss of 0.14% since the end of September. This Wednesday it is trading in positive territory for the second time in a row.
