Fed Minutes Reveal Heated Debate Over September Interest Rate Move: Traders Trim November Easing Bets

Minutes from the September Federal Open Market Committee (FOMC) meeting released Wednesday show that a back-and-forth likely took place among members about whether to cut interest rates by 25 basis points or the 50-basis-point reduction, with the latter ultimately chosen.

The discussion highlighted diverging views on how quickly the Federal Reserve should ease monetary policy amid lingering inflation concerns and solid economic growth.

A significant majority of participants ? with the sole exclusion of board member Michelle Bowman ? supported the 50-basis-point cut, which lowered the federal funds rate to a range of 4.75% to 5%.

Some members voiced a preference for a more modest 25-basis-point reduction. These participants argued that inflation remained elevated while economic growth and unemployment remained strong, suggesting a more gradual approach to easing would allow more time to assess economic conditions.

Several members said a 25-basis-point cut “would be in line with a gradual path of policy
normalization that would allow policymakers time to assess the degree of policy restrictiveness as the
economy evolved.”

Others warned that easing policy too aggressively could risk stalling progress on inflation, emphasizing the importance of communicating that rate decisions are conditional on evolving economic data, not preset courses.

Market Reaction: Odds For November Rate Cut Trimmed

Before the release of the minutes, market-implied probabilities via CME FedWatch had assigned an 87% chance of a 25-basis-point rate cut in November, with the remaining odds pointing to a hold in interest rates.

After the minutes were published, traders dialed back those expectations, with the odds for a cut falling to 75% and the chance of no rate cut rising to 25%.

• U.S. Dollar strengthens: The U.S. Dollar Index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF , gained 0.5% on the day, reaching levels not seen since mid-August.
• Treasury Yields rise: The 10-year Treasury yield surged to 4.07%, building on earlier gains in the session as traders adjusted their interest rate expectations.
• Stocks hold steady: Despite these developments, Wall Street remained stable, with the S&P 500 holding onto gains. The SPDR S&P 500 ETF Trust (SPY) hit record highs earlier in the day, continuing to hover near all-time levels.

Confidence In Inflation Easing

Participants acknowledged that inflation remained somewhat elevated, but nearly all agreed that recent data was consistent with inflation gradually returning to the Fed's 2% target.

Business reports also suggested weakening pricing power, with companies increasingly offering discounts as consumers became more price-sensitive. Additionally, some members also indicated a possible disinflationary trend in housing services, driven by a slower pace of rent increases for new tenants.

Labor Market Still Solid, But Less Tight

The labor market showed further signs of easing, with many participants noting that conditions had become less tight compared to pre-pandemic levels. Despite this softening, the job market remained robust, with layoffs limited and unemployment claims staying low.

Several participants also cited complications in assessing labor market conditions, including increased immigration, revisions to payroll data, and potential changes in underlying productivity growth.

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Fed Chair Jerome Powell illustration created using artificial intelligence via Midjourney.