Fed decision watershed: 50 basis point rate cut meets opposition votes

At 02:00 Beijing time, the Federal Reserve significantly cut interest rates by 50 basis points, lowering the federal funds rate from 5.25%-5.50% to 4.75%-5.00%, the first time since March 2020. The Federal Reserve stated that given the progress towards its inflation target and the "rough balance" of risks to its dual mandate, it decided to cut rates.

However, this decision was opposed by Federal Reserve Governor Bowman, who only wanted a 25 basis point cut. This marks the first time a Federal Reserve Governor has voted against an interest rate decision since 2005. The other 11 voting members of the Federal Reserve all supported the 50 basis point cut in the Fed's policy rate.

Prior to 1995, dissenting votes from Federal Reserve Governors were not uncommon, but since then, the vast majority of the over 90 dissenting votes have been cast by the Federal Reserve Chair. Federal Reserve Chairs typically seek consensus in decision-making, sometimes reaching compromises to avoid public disagreements that could weaken their credibility.

The Federal Reserve has reached a unanimous decision on interest rate resolutions for 17 consecutive times. Dissenting votes during the pandemic are rare. In fact, moments of divergence in Federal Reserve decisions are sometimes marked by dissent.

In June 2022, Kansas City Fed President George advocated for a smaller rate hike, but her colleagues opted for a 75 basis point hike to address rapidly accelerating inflation. This marked the first dissenting vote in four consecutive such large-scale actions, with the other three 75 basis point rate hikes all being supported by George.

James Knightley, economist at ING, stated before the meeting:

The appearance of dissenters clearly indicates that they are not plagued by "groupthink." There are many risks to balance, and (dissent) indicates that the Federal Reserve is engaged in difficult discussions.

On regulatory issues, Bowman has often publicly disagreed with the majority of the Federal Reserve Board members, repeatedly calling for easing regulatory burdens on banks.

Over the past year, Bowman has also become one of the most hawkish voices at the Federal Reserve on monetary policy, supporting a longer period of policy rate increases than most other central bank officials to ensure inflation is fully contained. Bowman's dissent on Wednesday marks the first hawkish stance among Federal Reserve Governors in nearly 30 years—meaning in favor of tightening monetary policy rather than easing it.

Dot plot signals rate cuts within the year

Federal Reserve officials believe that as inflation approaches the 2% target and unemployment rises, they need to lower rates to the range of 4.25%-4.50% by the end of the year, higher than their expectations in June.

September dot plot expectations

The current federal funds rate range of the Federal Reserve is 4.75%-5.00%, and the dot plot forecast suggests that **policymakers expect rate cuts of 25 basis points at both the November and December meetings this year According to the median forecast of policymakers, by the end of 2025, the policy rate is expected to be 3.4%, which means another 100 basis points rate cut next year. The policy rates at the end of 2026 and 2027 are both expected to be 2.9%, reflecting the imminent arrival of the neutral rate as perceived by the Federal Reserve policymakers.

Meanwhile, the current unemployment rate is 4.2%, more than half a percentage point higher than when the Federal Reserve began its year-and-a-half tightening cycle in March 2022.

These forecasts represent the views of individual policymakers rather than a consensus reached. The Federal Reserve dot plot shows that out of 19 officials, 2 officials believe that there should be no further rate cuts in the remaining meetings of 2024, 7 officials believe there should be a 25 basis points rate cut in 2024, 9 officials believe there should be a 50 basis points rate cut in 2024, and 1 official believes there should be a 75 basis points rate cut in 2024.

September Economic Expectations of the Federal Reserve