Jerome Powell’s power grows after Fed backs interest rate cut

The economy was not showing the kind of obvious warning signs that would typically prompt an aggressive response from the US central bank. But a very weak series of jobs data, including the August employment report last Friday, convinced Chairman Jerome Powell that a bigger-than-usual rate cut is needed to hedge against rising risks on the labor market. A pair of inflation reports that week showing price pressures continue to ease sealed the deal.

When the Fed issued its decision on September 18, forecasts showed that a narrow majority of officials favored cutting the benchmark rate by a percentage point or more this year, implying at least a big cut. But a sizable minority wrote just 75 basis points, suggesting support for three smaller moves.

In the end, however, all but one of the Federal Open Market Committee’s 12 voting members backed Powell’s bid to start big with a half-point cut. This is a key victory for the president as he seeks to extend an economic expansion that many predicted would end long ago. The lone holdout, Gov. Michelle Bowman, instead called for a more measured pace of cuts to avoid undermining progress on inflation.

“The president always has enormous power,” said Mark Spindel, founder of Potomac River Capital and co-author of a book on the Fed and Congress. “There is a clear success story in Powell’s ability to bring in everyone except Bowman, and he is now a stronger president.”

Speaking at a news conference after the meeting, Powell called the half-point cut “a good, strong start” that makes sense “from an economic point of view and also from a risk management point of view.”

Another half-point cut cannot be ruled out if the economy starts to stumble, economists say, given Powell’s priority on keeping the economy close to full employment as long as inflation cools.

Powell could have a chance to tip his colleagues toward a half-point cut again in the next few months if labor market data disappoints again. A number of officials who have spoken in recent days have signaled they are likely to support further cuts of a quarter point, but have left the door open to another big cut.

“Given his comments at Jackson Hole and what I heard from him at the press conference, yes, I think Chairman Powell would be inclined to cut another 50 basis points if there was more weakness in the labor market.” , said Matthew Luzzetti, chief US economist at Deutsche Bank.

Three key moments

Powell has asserted his leadership at three key times in the past year.

He signaled a possible peak in rates in December 2023, a time when some officials thought they might have to hike further. After a surprise spike in inflation in the first quarter of 2024 that caught many Fed officials by surprise, he patiently held rates steady until he gained confidence that price pressures had begun to ease again. Some lawmakers have complained that it puts the economy at risk. In the end, he opted for a big cut as his first move.

All of that action was driven by a strong sense that high interest rates are cooling — not breaking — the economy, and inflation could be tamed at a lower cost to jobs than many economists thought.

“Our success in achieving these goals matters to all Americans,” he said at the Sept. 18 news conference.

Powell framed the cut as insurance against further weakening of the economy — an act of risk management.

“You can take that as a sign of our commitment not to be left behind,” Powell said last week. “It’s a powerful move.”

A 50 basis point adjustment in rates is atypical for the Fed outside of a crisis. One concern was that it would signal that the Fed had grown concerned about signs of economic doubt. Powell, instead, said the move was a sign of confidence that inflation is on track to return to 2 percent, and in a rare acknowledgment that a bigger move is his own strong preference, he said it was ” satisfied” with the decision.

The latest jobs report not only showed employers added fewer jobs than forecast in August, but also revealed a weaker-than-expected pace of hiring for the past two months. Payrolls were cut by 86,000 in June and July, leaving the three-month average at its lowest level since mid-2020.

Risk management, a strategy adopted under former chairman Alan Greenspan, aims to prevent potential threats, even those that seem unlikely to materialize. And with a half-point cut leaving the Fed’s benchmark rate still in tightening territory, the cost of a big insurance cut was seen as low by several officials.

“Even after the 50 basis point cut, I think the overall stance of monetary policy remains tight,” Minneapolis Fed President Neel Kashkari wrote in a Sept. 23 essay explaining why he supported the broader move.

Lively debate

Powell’s calendars show that he holds talks with all 18 of his colleagues a few days before each FOMC meeting. Those conversations give officials an idea of ​​where the seat is. Powell’s strong support for a bigger cut at the news conference suggests he favored the half-point cut in the week before the meeting, when he began his regular calls.

Some Fed officials who spoke at the meeting described it and the period leading up to it as featuring a lively debate.

“There were active deliberations at the meeting,” Kashkari said in a Sept. 23 interview on CNBC. “There was a lot of discussion, obviously, leading up to the meeting.”

Atlanta Fed President Raphael Bostic said the two weeks before each FOMC meeting are a period of “intense discussions.”

In a question-and-answer session after a speech on September 23, he said: “If you want to get coordination and you want us all to be able to come together around one course of action, it’s going to take a lot of effort. communication, engagement, and we do a lot of that.”

There were some officials who saw a case for a quarter-point reduction at the September meeting. This included Fed Governor Christopher Waller, one of the FOMC’s most influential members.

In a speech on Sept. 6, Waller made it clear that he favored lowering rates, but many interpreted his precise wording as arguing for a quarter-point move. In a CNBC interview after the meeting, he said recent consumer and producer price reports that followed the speech ultimately pushed him to support a half-point move.