The Federal Reserve's last monetary policy meeting of the year will be held this Tuesday, followed by the announcement of the interest rate decision on Wednesday.

As the Federal Reserve enters its quiet period, Nick Timiraos from the "New Federal Reserve News Agency" published an article in the Wall Street Journal on the 15th, stating that investors widely expect the third interest rate cut this week. Following this, officials are prepared to slow down or even stop the rate cuts.

One option this week is to cut rates by a quarter of a percentage point and then use new economic forecasts to strongly suggest that the central bank is ready to slow down the pace of cuts.

The article points out that, in the face of differing internal voices, Powell must seek balance in policy adjustments. Since late summer, the frequency and magnitude of rate cuts have raised questions from some Federal Reserve officials who are concerned that cuts made too quickly could send the wrong signals to the market.

Jon Faust, a former senior advisor to Federal Reserve Chair Powell, stated that the current monetary policy of the Federal Reserve is at a crossroads, where it can either cut rates or choose to maintain the current stance.

"The overall assessment of Federal Reserve officials regarding the future direction of interest rates may be more influential than their specific decision for the next meeting."

"Seeking a balance between 'going too far' and 'not going far enough'"

Timiraso stated that there are disagreements within the Federal Reserve about whether to continue cutting interest rates. Some hawkish officials are concerned that premature rate cuts could keep inflation high and damage the credibility of the Federal Reserve. Additionally, some policies implemented after Trump's presidency might push inflation higher. Former Boston Fed President Eric Rosengren stated:

"If I were sitting as a voting member on the committee now, I would oppose cutting rates."

The performance of speculative assets like the stock market and Bitcoin has raised concerns among hawkish officials. Federal Reserve Governor Michelle Bowman stated in a speech earlier this month:

"Given the recent economic activity, it is hard to consider the current level of interest rates as restrictive."

Dallas Fed President Lorie Logan warned against cutting rates too much, as she believes a more 'normal' economic rate is much lower.

Meanwhile, dovish officials are concerned about slowing economic growth and believe it is necessary to cut rates to stimulate the economy. They argue that the Federal Reserve has raised rates significantly over the past two years and now needs to carefully assess the risks of cutting rates.

Powell believes it is essential to prevent inflation from becoming too high while also avoiding weak economic growth. He emphasized that the Federal Reserve needs to find a balance between 'going too far' and 'not going far enough':

"We recognize the risk of going too far too quickly, but we must also be aware of the risk of not going far enough. It seems that we are at the right place where we need to be."

Timiraso pointed out that the labor market in the USA is currently delicate, with both hiring and layoff rates at a low level. Economic growth is relatively stable, but the unemployment rate has increased.

Inside story of the Federal Reserve's interest rate decision: balance, controversy, and adjustments.

Timiraso pointed out that Powell needs to strive for consensus among the 18 members of the committee. Although the inflation situation has eased, there are still differences within the committee regarding the direction of interest rate policies.

At the beginning of 2023, some officials who originally held a hawkish stance began to change their attitudes and gradually accepted a more moderate inflation report. Federal Reserve Governor Waller boldly proposed to lower interest rates six times by 25 basis points in 2024, becoming one of the officials advocating the largest interest rate cuts. With the stagnation of inflation in spring, Waller's view also shifted to support maintaining interest rates unchanged.

On the eve of the September meeting, Federal Reserve officials signaled a tendency for minor interest rate cuts through public speeches. However, in a closed-door meeting, Powell and the advisory team made an unexpected decision: to cut interest rates significantly by 50 basis points.

Timiraso pointed out that this decision drew on former Chairman Greenspan's risk management strategy. Considering the economic development trends and the multiple possible rate cuts in the future, decision-makers believed that the risk of a significant interest rate cut was relatively low.

This decision was not unanimous. Bowman voted against it, which is the first time since 2005 that a Governor has opposed the Federal Reserve's monetary policy decision. To quell internal controversy, Powell emphasized in subsequent public speeches that the 50 basis point cut was not a new rhythm and that cautious decisions would be made in the coming meetings.

Subsequent economic data showed that the resilience of the USA economy exceeded expectations. Income growth and personal savings rates were higher than initially estimated, easing concerns about an economic recession. This indicates that the Federal Reserve's substantial interest rate cuts may have been overly aggressive.

Waller initially supported a smaller interest rate cut but was ultimately persuaded. He later acknowledged that this decision was akin to purchasing Insurance, and even if it was not needed in the end, it was wise to be prepared in advance.

In summary, the Federal Reserve's interest rate cut decision-making process was filled with complexity and uncertainty. The internal disagreements within the committee, the constantly changing economic data, and the decision-makers' assessments of risk all had significant impacts on the final direction of policy.

Editor/ping