Fed Minutes Cautiously Hint at More Rate Cuts. The Path Ahead Is Anything But Clear.

Federal Reserve Chair Jerome Powell faces a tough balancing act between concerns about a soft labor market and resurgent inflation. (Chip Somodevilla/Getty Images)

Key Points

• Most Federal Reserve officials anticipate further interest rate reductions this year, despite ongoing concerns about elevated inflation.
• The Federal Reserve lowered rates by a quarter percentage point to between 4.00% and 4.25% at its September meeting, the first cut this year.
• Officials are balancing persistent inflation, which has been above 2% for nearly five years, with a weakening labor market and declining income growth expectations.

Most Federal Reserve officials said it would likely be appropriate to further lower interest rates this year, though they expressed concerns over still-elevated inflation at their latest policy meeting.

Minutes from the central bank’s Sept. 16-17 meeting—where officials lowered rates for the first time this year by a quarter percentage point to between 4.00% and 4.25%—show a committee wrestling with conflicting economic signals and struggling to reach consensus on which is the most pressing issue, stubborn inflation or a weakening labor market.

In the minutes, officials agreed that a September rate cut was necessary in light of recent lackluster employment data. It was the path forward that created disagreements.

Most participants “judged that it likely would be appropriate to ease policy further over the remainder of this year,” read the meeting notes, released Wednesday afternoon.

Some policymakers, however, “noted that, by several measures, financial conditions suggested that monetary policy may not be particularly restrictive, which they judged as warranting a cautious approach,” according to the minutes. In other words, the strength of the economy, an exuberant stock market, and narrow credit spreads suggest that the Fed doesn’t need to rush to lower rates.

That push-and-pull is visible in policymakers’ economic projections. Last month’s forecasts showed that 10 officials thought there should be two more cuts this year, while nine wanted there to be one or fewer.

Still, even those who thought it would be appropriate to ease policy expressed growing concern over stagnant inflation rates. Inflation is at its strongest pace since January and has remained above the Fed’s 2% goal for nearly five years, posing a risk to the monetary policy outlook.

“Participants generally judged that upside risks to inflation remained elevated and that downside risks to employment were elevated and had increased,” read the minutes. Policymakers noted that, if rates were lowered significantly in the current circumstances and inflation stays above target, long-term price expectations could also increase “and make restoring price stability even more challenging.”

But, at the same time, the labor market is weakening and income growth expectations have slid to their lowest levels since 2021. That means “if policy rates were kept too high for too long, then unemployment could rise unnecessarily, and the economy could slow sharply,” Fed officials noted in the minutes.

As of three weeks ago, Fed policymakers were cautiously optimistic about further rate cuts this year. But that doesn’t mean they’re set in their ways. Much has changed since last month’s meeting. Notably, the government shutdown has delayed the release of September’s jobs report and could lead to mass layoffs of government workers. On Tuesday, President Donald Trump hinted that furloughed federal workers may not be guaranteed backpay, further reducing their spending power.

The bottom line, wrote Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute, is that nothing is certain.

“The Fed is not on a preset path, data dependency is now more necessary than before, especially as Fed officials attempt to calibrate between conflicting goals,” he wrote.

Several officials, including St. Louis and Kansas City Fed presidents Alberto Musalem and Jeffrey Schmid have signaled more caution and a possible pause on rates at the coming Oct. 28-29 meeting. Others like Vice Chair for Supervision Michelle Bowman and Gov. Stephen Miran, have called for further cuts.

Miran, the new Fed governor appointed by President Donald Trump, was the lone dissenter, in favor of a half-percentage-point rate reduction during the September meeting.

Stocks rallied to new highs on Wednesday afternoon, indicating that investors liked what they read. Markets are currently pricing in a 92.5% chance that Fed officials lower rates at its next meeting and a 78% chance they lower rates again at their December meeting, according to the CME FedWatch tool.

Write to Nicole Goodkind at nicole.goodkind@barrons.com