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all but one of the 12 voting members supported powell's proposal to cut interest rates aggressively, starting with a 50 basis point cut. image source: photo by anna moneymaker/getty images

a week before fed officials gather in washington this month, they are divided over how quickly they should cut interest rates.

the economy is not showing the kind of clear warning signs that would normally prompt an aggressive response from the fed. however, a series of notably weak employment data, including friday's august jobs report, has convinced fed chairman jerome powell that a deeper than usual rate cut is necessary to prevent labor market risks are rising. two inflation reports released that week showed that price pressures continued to ease, which ultimately prompted the federal reserve to take interest rate cuts.

when the fed released its decision on sept. 18, forecasts showed a slim majority of officials favoring lowering the benchmark interest rate by a full percentage point or more this year — implying at least one major rate cut. but a significant minority of officials believe in cutting the benchmark rate by just 75 basis points, suggesting they support three smaller cuts.

however, in the end, all but one of the 12 voting members of the federal open market committee supported powell's aggressive rate cuts starting from 50 basis points. it's a key victory for powell as he attempts to extend an economic expansion that many predicted was long over. the only dissenting fed governor, michelle bowman, called for a more measured pace of rate cuts to avoid undermining progress on inflation.

mark spindel, founder of potomac river capital, said: "chairmen have always had tremendous power. powell's ability to convince everyone except bowman is obviously a success story. he is more powerful today. chairman." he has co-authored a book on the fed and congress.

at a press conference after the meeting, powell called the 50 basis point rate cut a "good strong start" that was reasonable from an "economic and risk management perspective."

economists say another 50-basis-point rate cut cannot be ruled out if the economy begins to slide, as powell has prioritized keeping the economy close to full employment as long as inflation cools.

if labor market data disappoints again, powell may have the opportunity to nudge his colleagues toward a 50 basis point cut again in the coming months. in recent days, several officials have said they may support a further 25 basis point rate cut but have not ruled out another sharp cut.

"given his remarks in jackson hole and what we heard him say at the press conference, yes," said matthew luzzetti, chief u.s. economist at deutsche bank. "i think chairman powell would be inclined to cut interest rates by another 50 basis points if the labor market softens further."

three critical moments

over the past year, powell has demonstrated his leadership at three key moments.

he suggested rates could peak in december 2023, at which point some officials believe they may have to raise rates further. after an unexpected rise in inflation in the first quarter of 2024 alarmed many fed officials, he patiently kept rates on hold until he was convinced that price pressures were starting to ease again. some lawmakers complained he was putting the economy at risk. in the end, he chose to cut interest rates sharply as his first move.

all of these actions were guided by a strong sense that high interest rates were cooling the economy, not crashing it, and that inflation could be controlled with less of an impact on employment than many economists imagined.

"our success in achieving these goals matters to all americans," he said at a press conference on september 18.

powell said the rate cut was a risk management move to prevent the economy from weakening further.

"you can take this as a signal that we're committed to not falling behind," powell said last week. "this is a strong move."

it is unusual for the fed to cut interest rates by 50 basis points in non-crisis times. there are concerns that this would signal the fed's growing concern about signs of a weakening economy. instead, powell said the move signaled the fed's belief that inflation is on track to return to 2%, and in a rare admission that a larger adjustment was his strong preference, he said he was "pleased" with the decision.

the latest jobs report not only showed fewer jobs were added in august than expected, but also showed hiring in the first two months was slower than initially estimated. employment fell by 86,000 in june and july, with the three-month average hitting its lowest level since mid-2020.

the risk management strategy promoted by former federal reserve chairman alan greenspan was designed to protect against potential threats, even those that seemed unlikely to materialize. with the fed's benchmark interest rate still in a restrictive range after a 50 basis point cut, some officials believe the cost of a significant cut in insurance rates is low.

“even after a 50 basis point rate cut, i believe the overall stance of monetary policy remains tight.” minneapolis fed president neel kashkari said in a september 23 article wrote, explaining why he supports aggressive interest rate cuts.

heated debate

powell's schedule shows he holds discussions with all 18 officials in the days leading up to each fomc meeting. these discussions allow officials to understand the chairman's position. powell strongly supported a deeper rate cut at the press conference, indicating that he was leaning towards a 50 basis point cut when he began a regular call a week before the meeting.

some fed officials who spoke after the meeting described the meeting and its lead-up as intense debate.

kashkari said in an interview with cnbc on september 23: "there were active discussions at the meeting. obviously, there was a lot of discussion before the meeting."

atlanta fed president raphael bostic said the two weeks leading up to each fomc meeting are a time for "intense discussions."

during a question-and-answer session after his speech on sept. 23, he said, “if you want coordination so that we can all unite around a course of action, that requires a lot of communication and engagement, and here we are. a lot of work has been done.”

at the september meeting, a handful of officials saw the case for a quarter-point rate cut. among them is one of the most influential members of the federal open market committee, fed governor christopher waller.

in his speech on september 6, waller made it clear that he supported a rate cut, but many accurately interpreted his words as supporting a 25 basis point cut. in an interview with cnbc after the meeting, he said that the recent consumer and producer price reports released after the speech finally prompted him to support a 50 basis point interest rate cut.