Debate rages over how quickly to cut interest rates

Since Jerome Powell became chairman of the Federal Reserve Board in 2018, members of his rate-setting body have voted unanimously in favor of the decisions.

The Fed’s Sept. 18 decision to cut the key Fed interest rate by half a percentage point also featured very public dissent on the vote.

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The Fed’s rate-setting body, the Federal Open Market Committee, had a heated debate behind the scenes at its meeting about how big the rate cut should be.

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Fed Governor Michelle Bowman voted against cutting the Fed’s key federal funds rate to 4.75% to 5%. The rate was 5.25% to 5.5%.

She wanted to cut the rate to 5% to 5.25%. After the meeting, she said she feared inflationary pressures could flare up again.

But the minutes of the meeting, released on October 9, suggest it took some work to reach the decision.

Powell and others, looking at data that suggested a weakening economy, wanted to get ahead of the softness.

A number of people, whether voting members of the committee or not, were at least as comfortable with a quarter point reduction. For example, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told a bank meeting in Minnesota on Oct. 8 that he was fine with a half-point rate cut or a quarter-point cut.

The FOMC sets interest rate policy for the Fed. Its members include all Fed governors, the president of the Federal Reserve Bank of New York, and four presidents of the other 11 Federal Reserve banks. Bank presidents serve as voting members every four years in a rotation established by policy.

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Bond investors have been selling, but more cuts are coming

The details of the debate, which filled nearly three pages of the Fed’s meeting minutes, were enough to push bond prices and interest rates higher.

Just as importantly, the news changed Wall Street’s estimates of how quickly the Fed will taper in the future.

The 10-year Treasury yield rose to 4.07% from 4.02%. It wasn’t much, but the change was the fifth gain in the past six sessions for the 10-year note.

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The October 9 yield closed 12.4% higher than the lowest since 2024, a September 16 yield of 3.62%. This was a day before the start of the Fed’s two-day meeting in September.

The Oct. 9 yield hike pushed mortgage rates higher. The 30-year fixed rate mortgage was at 6.67%, up from 6.62% on Oct. 8 and up from the year’s low of 6.11% on Sept. 11.

Traders work on the New York Stock Exchange in early September.

Michael M. Santiago/Getty Images

The road ahead

The bottom line for home buyers and sellers is not to expect rates to drop as quickly as they might have expected.

The Fed may institute another rate cut at its Nov. 6-7 meeting and another at its Dec. 17-18 meeting.

As of Oct. 9, Wall Street expected declines of a quarter point at each meeting. More cuts are expected in 2025, with some investors betting the Fed funds rate falls below 4%.

It should be noted that the yield gains are part of a larger debate among bond investors who believe the Fed’s rate cut was too much and have enough financial power to make their views known.

Stock buyers were not deterred

That said, the 10-year closing higher — and higher yields across all other Treasuries — did little to limit the second day of gains in the stock market.

The Standard and Poor’s 500 and Dow Jones Industrial Average both closed at record highs of 5,792 and 42,512, respectively, on October 9.

The Nasdaq Composite’s close at 18,292 was up nearly 109 points, but 2.9 percent below its July 10 peak of 18,647.

SPDR S&P 500 ETF Trust (SPY) increased by 0.7%. The S&P 500 was led by technology stocks. SPDR Technology Sector Select fund (XLK) added 1.1%. Only utility stocks were lower.

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