Something just happened at the Federal Reserve for the first time since 2005. Should investors be worried?

The Federal Reserve recently cut the target range of its benchmark federal funds rate by 50 basis points. The move was widely anticipated and largely welcomed by investors, who have been looking for a rate cut for some time.

But the decision also came with a little surprise. Not all voting members of the Federal Open Market Committee (FOMC) agreed with the Fed’s decision to cut rates by 50 basis points. Although some may think that such things happen all the time, they do not. It is the first time a voting member has dissented in nearly two decades.

Let’s take a look at what this could mean for the market and whether investors should be concerned.

A cut of 25 or 50 basis points?

The FOMC holds eight meetings throughout the year, where the 12 members discuss the current state of the economy as well as monetary policy, and ultimately conclude each two-day meeting with a decision on whether or not to adjust the rate federal funds and how much it costs.

The FOMC’s 12 members include the president of the Federal Reserve Bank of New York and the seven members of the board of governors, who serve 14-year terms and are appointed by the president and confirmed by Congress. The other four members come from the 11 presidents of the other regional Federal Reserve banks. These members serve one-year terms on a rotating basis.

Since 2005, the 12-member tariff-setting committee has always taken tariff-setting decisions unanimously. But at the Fed’s September meeting, Governor Michelle Bowman disagreed with the 50 basis point cut. She would have preferred a cut of 25 basis points.

Now, it’s not as if Bowman’s preference for a 25-point cut is super weird. Heading into the meeting, the market was somewhat indecisive. Futures indicated that about 60 percent to 65 percent of traders believed the Fed would cut by 50 basis points, while the rest thought a 25 basis point cut was coming. Heading into the meeting, economists from Goldman Sachs also said they believed the Fed would go ahead with a 25 basis point cut.

The debate really hinged on whether it was prudent for the Fed to move forward with a 50 basis point cut, with the economy showing relative strength. Headline inflation has been easing and reached 2.5% in August, but it is still short of the Fed’s 2% target. Fed Chairman Jerome Powell said at the post-meeting news conference that ideally the Fed would like to see inflation around 2% for some time.

The 50 basis point cut reflects the Fed’s decision to shift its focus more to the labor market, which has shown signs of deterioration this year, rising from a record low of 3.4% in January 2023 to 4.2% in August. While the Fed wanted to see the labor market cool in recent years, it now does not want to see further deterioration.

Should investors be worried about Bowman’s dissent?

I’m not sure “worried” is the right word, but this tells me it’s not time to declare victory over inflation or rule out a recession entirely. Note that the Fed has made several 75 basis point rate hikes over the past few years in unison, so Bowman’s disagreement is not just about the size of this recent rate cut.

It’s also reasonable to assume that, like any other agency, there is a lot of politics going on at the Fed. Chairman Powell would certainly have liked to start the rate cut cycle with a unanimous decision.

In short, investors should continue to monitor the economy carefully.