Hours before the Federal Reserve announced its interest-rates cuts on Wednesday, nobody knew exactly what was coming. Would Fed chair Jerome Powell opt for a measured, quarter percentage point change in rates, as he had for the last year? Or would he go big with a double-sized cut, signaling that the economy might be deteriorating faster than expected?
At 2 p.m., the Fed announced that it was cutting half a percentage point — a jumbo-sized adjustment to borrowing costs that immediately caused the stock market to go vertical. The aggressive move caused an exuberant buying frenzy on Wall Street. But while Wednesday’s Fed meeting was supposed to be a triumphant moment for Powell — one where he could unofficially claim victory over inflation that took root over the past two years and take credit for guiding the economy to a so-called soft landing — it ended up being more complicated. The Fed’s actions reveal that, even with the economy maintaining a rare balance of low inflation and high employment, it still requires dramatic action to stave off a decline.
Powell framed it differently. “The U.S. economy is in good shape,” he said. “It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong pace,” Powell said during an afternoon press conference. “We want to keep it there.”
It’s no exaggeration that trillions of dollars were at stake over the size of the cut. The bond market, the stock market, values of homes, the unemployment rate, the very strength of the U.S. dollar — all these would rise or fall depending on the central bank’s decision. Since traders were leaning toward a bigger cut, they likely would have sent markets sinking if the Fed had only gone with a quarter-point reduction.
A bigger cut was Wall Street’s preferred outcome, but it will also give investors pause. (The opposite held true for a shallower cut — one on hand, it wasn’t what Wall Street wanted, but it would have been a reassuring sign that the economy was essentially fine, and anything more would risk sending prices back higher.) A larger cut also comes with higher risk. If Powell turns out to get it wrong, and inflation roars back, it would be an embarrassing — and more difficult — coda to an already delicate situation.
Powell had given some insight into how he, along with most of the rest of the Fed board, settled on a big rate cut. Since the last Fed meeting in July, a lot of unemployment and inflation data has shown that inflation, and the economy in general, has cooled. Powell had also pointed to a report showing that jobs numbers from earlier this year were artificially high, by some 800,000 jobs. The goal of the big cut, he said, was to not move so slow that a recession could creep up on them. “We do not think we think this is timely, but I think you can take this as a sign of our commitment not to get behind,” Powell said.
The Fed, despite its reputation as a gnomic Delphi a few blocks from the White House, actually has a policy of trying to be somewhat transparent about how it will change interest rates, if at all. Powell himself has appeared frustrated at times that traders have ignored his speeches, and he’s sometimes resorted to putting on an especially unhappy glower when he has sought to get a pessimistic message across. When Powell wants Wall Street to pick up clues about what the Fed is planning, there tend to be more speeches from central bank officials giving their thoughts about the economy; other times, news trickles out via the Wall Street Journal’s dedicated reporter. For the last 21 years, this has been a more-or-less standard practice, and the Fed has only deviated from it a few times since the Alan Greenspan era. But silence from the Fed ahead of Wednesday’s meeting suggested that whatever Powell wanted to do, he hadn’t yet convinced a clear majority of the Federal Open Market Committee, the 12-member board that sets interest rates, to go along with him.
There appeared to be signs of discord. A few of the most powerful Fed officials under Powell — including Fed governors Christopher Waller and Michelle Bowman, and John C. Williams, the President of the New York Fed — had sounded skeptical or ambivalent about the kind of double or triple-sized cut Wall Street wanted, versus a 25 basis-point increment. “He works from consensus; he doesn’t like dissent,” Robert L. Hetzel, the author of The Federal Reserve: A New History, and a former Vice President at the Federal Reserve Bank of Richmond, said of Powell. “That tells you something about Waller and [Williams]. He really needs to bring them along, because they’re serious economists. If he had been able to bring them along, then I think the others would have fallen in line pretty readily.”
Bowman did in fact dissent, making her the first Fed Governor to do so since 2005. (She wanted a quarter-point cut). It appears Powell was able to wrangle the rest of the committee to not only go along with a bigger cut, but to see the case for far lower rates by December and deep into 2025. The Fed sees inflation as moving toward its target rate of 2 percent for the next two years, and the unemployment rate staying just a bit higher, to 4.4 percent, than where it is now. Powell gave no indication about whether the next cut will be a big one, but he seemed pleased that he was able to start off the cutting cycle so strongly. “There’s no sense that the committee feels it’s in a rush to do this,” Powell said. “We made a good, strong start to this. And that’s really, frankly, a sign of our confidence — confidence in inflation is coming down toward 2 percent on a sustainable basis. That gives us the ability we can make a good, strong start. And I’m very pleased that we did.”
