Fed Rates: Inflation Fears Linger as Minutes Reveal Powell’s Uncertainty on 25 or 50 Basis Point Cut

Federal Reserve Minutes Reveal Monetary Policy Shift

The recently published minutes from the Federal Reserve’s latest FOMC meeting, held on September 18, mark a significant turning point in U.S.
monetary policy as they officially signal the beginning of a monetary easing phase.

With inflationary concerns now subsiding, the Fed announced a remarkable cut to the federal funds rate by 50 basis points, a move that comes after having raised rates 11 times over the past two years from March 2022 to July 2023.
The new rate range is set between 4.75% and 5%, establishing a clear transition in policy direction.

Inflation Concerns Persist Despite Rate Cut

The minutes indicate that a “significant majority” of the committee members showed support for this substantial cut, bolstered by increased confidence in sustainable inflation reaching the Fed’s 2% target.

However, the Fed acknowledges ongoing risks in achieving its dual mandate of stable employment and inflation balance amidst a solidly expanding economy, yet with a halt in job growth and low unemployment rates.

Despite advancements, inflation levels remain somewhat elevated.
While most members reported balanced risks regarding inflation outlook, some favored a more conservative 25 basis point cut due to persistent inflation concerns.
Notably, Governor Michelle Bowman argued for a 0.25% reduction, citing core inflation far exceeding the 2% target.

The FOMC members are united in the need for a more neutral policy stance moving forward, with a commitment to reevaluating macroeconomic indicators for potential adjustments to rates.

Market Reactions to the ‘Jumbo Cut’

The “Jumbo Cut,” as the substantial reduction has been dubbed, sparked excitement among bullish traders, who foresee ongoing rate cuts.
The FOMC’s dot plot suggests at least two more cuts in 2024, four in 2025, and two further reductions by 2026, tapering rates down to 2.9%.

Despite initial euphoria, market sentiment wavered following statements from Jerome Powell, indicating no immediate urgency for further cuts as the Fed prioritizes data-driven recalibrations.

Recent economic signals do not indicate a distressed economy; rather, developments like the Nonfarm Payrolls have shown robust performance, contradicting the need for continuous rate cuts.

The dollar’s performance and U.S.
Treasury yields reflect this sentiment shift, with noticeable increases in 10-year Treasury yields surpassing 4% for the first time since August and the dollar rising significantly against major currencies.

As anticipation builds around the upcoming U.S.
CPI index release, essential for gauging inflation trends, all eyes remain on the potential implications for future monetary policy.