Deconstructing the FOMC's decision to cut by 50

Chair Powell almost certainly leaned heavily on "risk management" considerations to bring most of the Committee along for a big rate cut on September 18

A close read of the transcript from yesterday’s press conference, combined with the updates to projections in the Survey of Economic Projections and other factors suggest that the policy discussion at the FOMC was strongly influenced by a combination of risk-management consideratons and notable reductions in forecasts by most FOMC participants that Powell employed to bring the Committee along with his decision to cut by 50 basis points instead of the more typical 25 basis points.

At the meeting, there were likely two participants, Bowman and Waller, who strongly favored only a quarter-point cut. There were likely several others who somewhat favored cutting by 25 basis points (instead of 50).

It appears that most FOMC participants lowered their end-of-2024 rate forecasts between June and September and all of them showed at least 50bps of cuts this year.  The overwhelming majority (17 of 19) projected at least 75bps of cuts between September and December — a span that includes 3 scheduled FOMC policy meetings.

So Powell stressed that inflation is coming down, labor markets are softening, and we don't want that softening to turn into something worse.  Furthermore, even the relative hawkish among you want at least 50bps of cuts this year. So, why not do more now (50) instead of going slower (only 25) and leaving more downside risk on the table?  In essence, he would have argued that there was a strong risk-management argument to front-load the cut if you were already prepared to do at least 50 this year.

Cutting by 50bps up front has the advantage of showing more decisiveness, which he would have suggested would aid the public's perception of and faith in the Fed.

Then, those who were on board with 50 would have chimed in, loudly, and the argument would be all but over.

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That's just my story and I'm sticking with for as long as it takes to post this note!