Something Just Happened at the Federal Reserve for the First Time Since 2005. Should Investors Be Worried?

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

But the decision also came with a bit of a surprise. Not all the voting members of the Federal Open Market Committee (FOMC) agreed on the Fed’s decision to lower rates by 50 basis points. While some might think this sort of thing happens all the time, it doesn’t. This 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 worried.

A 25- or 50-basis-point cut?

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 federal funds rate, and by how much.

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 nominated by the president and confirmed by Congress. The remaining 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 rate-setting committee has always made its rate-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 25-basis-point cut.

Now, it’s not like Bowman’s preference for a 25-point cut is super outlandish. Heading into the meeting, the market was somewhat undecided. Futures indicated that roughly 60% to 65% of traders thought the Fed would do a 50-basis-point cut, while the remainder thought a 25-point cut was coming. Heading into the meeting, economists at Goldman Sachs also said they thought the Fed would move ahead with a 25-point cut.

The debate really hinged on whether it was prudent for the Fed to move ahead with a 50-point cut with the economy showing relative strength. Headline inflation has been on the decline and hit 2.5% in August, but that’s still not at the Fed’s 2% target. Fed Chair Jerome Powell said at the post-meeting press conference that the Fed would ideally like to see inflation around 2% for some time.

The 50-point cut reflects the Fed’s decision to turn more of its attention to the labor market, which has shown signs of deterioration this year, rising from a historic low of 3.4% in January 2023 to 4.2% in August. While the Fed has wanted to see the labor market cool in recent years, it now no longer wants 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 that it’s not time to declare victory on inflation, or completely rule out a recession. Keep in mind that the Fed did multiple 75-basis-point rate hikes over the last few years in unison, so Bowman’s dissent is not just about the magnitude of this recent rate cut.

It’s also reasonable to assume that like with any other agency, there is plenty of politics that goes on at the Fed. Chair Powell would surely have liked to commence the rate-cutting cycle with a unanimous decision.

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