In a somewhat contentious debate at the last Federal Open Market Committee (FOMC) on September 16-17, 2023, Federal Reserve officials found themselves at loggerheads. Among these were discussions about the likelihood of future interest rate cuts. The meeting brought together a total of 19 officials, 12 of which were allowed to take part in the voting process. A narrow 10-9 majority signaled expectations for two more cuts by year-end.
Stephen Miran, one of the newly appointed Governors, had taken office just hours before the meeting and provided the dissenting vote. He fought tooth and nail for a much stronger, more aggressive approach. He had supported a half-point cut rather than the quarter-point cut that was eventually approved. This decision brought the federal funds rate to a target range of 4% to 4.25%.
During the FOMC discussions, officials deliberated on the potential for further easing of policy in response to changing economic conditions. According to the meeting minutes, the majority of attendees reported feeling an increasing threat to their jobs. They further felt a diminished threat of inflation, and these beliefs guided their policy actions.
“Participants generally noted that their judgments about this meeting’s appropriate policy action reflected a shift in the balance of risks,” – Fed minutes
Project officials admitted it was right to be somewhat gun shy when it came to making some policy changes that would stick. Many agreed that current financial conditions suggested that monetary policy might not be overly restrictive, allowing room for adjustments if necessary.
An overwhelming majority of survey respondents now expect at least two cuts of 25 basis points by year-end. Further, nearly all of them expect to see three reductions over the rest of 2023. Those projections indicate at least one more rate cut in both 2026 and 2027. Already, analysts predict the federal funds rate will settle in a long-term range of about 3%.
“In particular, most participants observed that it was appropriate to move the target range for the federal funds rate toward a more neutral setting because they judged that downside risks to employment had increased over the intermeeting period and that upside risks to inflation had either diminished or not increased,” – Fed minutes
Their infamous “dot plot” released after each meeting showed a division among the officials about how many rate cuts in the future. Miran stands out as a lone “dot,” further emphasizing his high preference for a more aggressive easing path. This perspective is in stark opposition to the prevailing view among the committee members.
“Some participants noted that, by several measures, financial conditions suggested that monetary policy may not be particularly restrictive, which they judged as warranting a cautious approach in the consideration of future policy changes,” – Fed minutes
Federal Reserve Board officials have signaled their willingness to lower the target range for the federal funds rate. They want to streamline it, as well as align it better with today’s economic realities. As they go forward, they intend to be flexible in response to new changes in the economy, should they emerge.
“In considering the outlook for monetary policy, almost all participants noted that, with the reduction in the target range for the federal funds rate at this meeting, the Committee was well positioned to respond in a timely way to potential economic developments,” – Fed minutes