The minutes of the meeting that the Federal Reserve concluded on September 18, when the central bank of the United States decided to lower interest rates by 0.5 points to the range of 4.75%-5%, have been in focus of investors in recent days. And that meeting marked the turning point after four and a half years without decreases in the price of money. The question was not so much whether rates should be lowered or not, but rather how much to lower them. Finally, the document published this Wednesday It denotes a certain optimism regarding the possibility of the long-awaited soft landing, illuminates a more moderate pace in future rate declines and sheds light on the debate that resulted in the choice of the most aggressive alternative among the options that were on the table.
A “substantial majority” of the Open Market Operations Committee – all members except one – voted in favor of lowering rates by 0.5 points given the evolution of inflation data and in light of the numbers from the labor market . At that time, as the minutes recall, the Fed had at its disposal inflation that was declining “but still remains somewhat elevated,” solid GDP growth, and a labor market that caused some concern. “The pace of job creation has been moderating throughout the year and the unemployment rate has increased, although it remains low,” the document describes. The vote reflects a large majority in favor of subtracting 0.5 points, but there were debates before it in which several members expressed that they also felt comfortable with a decrease of 0.25 points.
What there was unanimity about was the need to remain very attentive to the evolution of the data and the economic environment in order to determine future actions. Also when it comes to being prepared to act if the situation demands it. The members of the committee already announced at the end of the September meeting that there will be more cuts before the end of the year, leaving rates in the range of 4.25%-4.5%, which would imply two new reductions in the meetings. on November 7 and December 18. With the US elections just two days before their next meeting, the president of the Federal Reserve, Jerome Powell, wanted to temper the markets’ expectations at the end of September by ruling out another new drop of 0.5 points at once.
In addition to inflation and employment data, the minutes show that the committee took into account the market’s expectations for that meeting. Finally, that was one more argument to cut the 0.5 points, since at that time the probabilities given by the consensus of lowering rates by 0.5 points exceeded those of a fall of 0.25 points. Currently, expectations for the meetings that remain in 2024 are in line with the roadmap that Powell defended at the end of last month, that is, rates of 4.25%-4.5% at the end of the year.
The soft landing
Committee members highlighted during the meeting that US economic activity has continued to grow “solidly” and highlighted the “resilience of consumer spending.” However, two members warned that the increase in real household incomes in the United States had indeed helped the health of consumption, but that, on the other hand, signs of a slowdown or budget problems had begun to appear in some households. . Among these signs are the greater defaults that have occurred on consumer loans or automobile loans.
These signs, interpreted as a symptom of problems in households that have middle or low incomes, could harm growth in the coming quarters in the eyes of the members who listed them. The caution among businessmen when making hires, the impact of new technologies, the increase in productivity… By putting all these factors in the balance, the majority of the members of the highest decision-making body of the Fed concluded that they expect a GDP growth aligned with the historical trend for the coming years. Judging by the content of the minutes, barring unforeseen events, the Fed does not plan to undertake more aggressive cuts in the remainder of the year.
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