First Fed dissent note in 19 years – why it happened

23 Sep 2024 , 09:47 AM

DISSENT NOTE BY MICHELLE BOWMAN

It is not often that you get to see a dissent note in the FOMC meeting, unless the Fed member feels very strongly about a particular move. On September 18, 2024 when the Fed presented its statement, it cut rates by 50 bps. That was not entirely unexpected. The CME Fedwatch had been factoring in 50 bps rate cut in September and another 50 bps rate cut by end of 2024. However, the markets did not anticipate that the Fed would really be aggressive enough and take the risk of a 50 bps rate cut. After all, a rate cut could have different interpretations. It could be interpreted as a sign that inflation was now fully under control, which is still debatable. The other interpretation could be that the growth situation was a lot more serious than what the data was showing; and that was once again debatable. However, when the Fed announced its policy on September 18, 2024, it did go ahead and cut rates by 50 bps, the first 0.5% rate cut since 2007. But, there was more to it!

The September 18, 2024 FOMC meet also marked a key event in that for the first time in 19 years there was a dissent note. Governor Michelle Bowman has been long known to be a hawk who was of the view that a hawkish stand should continue till inflation came down to 2% on a sustainable basis. In her dissent note, Bowman suggested that she was open to a 25 bps rate cut but a 50 bps rate cut was something she had objections to. Significantly, the last time a Fed governor had put up a dissent note it was Marc Olson in 2005, a full 19 years ago. Subsequently, Michelle Bowman has also give  statement (available on the Federal Reserve website) on why she had put up the first dissenting note in 19 years.

WHY MICHELLE BOWMAN PUT UP A DISSENTING NOTE

There were several reasons for Governor Michelle Bowman putting up a dissent note in the September 2024 FOMC meet. Here are some of the key takeaways.

• Governor Bowman dissented from the Federal Open Market Committee’s (FOMC) decision to lower the target range for the federal funds rate by 50 basis points from the range of 5.25%-5.50% to the new range of 4.75%-5.00%. Governor Bowman was quite categorical that she would have preferred a 25 bps rate cut at this juncture instead of what she saw as an attempt by the Federal Reserve to front loan rate cuts.
• Michelle Bowman was of the view that in the light of the progress made since the middle of 2023 on lowering inflation and cooling the labour market, it would be more than appropriate to recalibrate the level of the federal funds rate. However, Bowman felt that the start of a process after a long gap should have been more calibrated since front-loading does give out a slightly desperate picture to the market. Hence she felt that a smaller first move would have been the preferred choice at this juncture.
• Bowman did not agree with the perception that the labour data had raised growth concerns for the US economy and underlined that there were no immediate risks of a hard landing. In fact, the US economy remains strong, with solid underlying growth in economic activity. Also adjusted for certain seasonal and cyclical factors, the labour market continued to be near full employment. While the hiring appears to have softened, layoffs still continue to remain low; indicating that there is no emergency.
• While Bowman believed that the normalization in labour market conditions was one of the core issues here, the focus should be on bringing down wage growth, which has been achieved. The spike in unemployment to 4.2% was more likely a cyclical blip due to extraneous factors. According to Bowman, the labour data had become more uncertain and tentative due to increased measurement challenges. Also, it was getting progressively tougher to assess the impact of recent immigration flows. A robust labour market was also signalled by strong consumption trends, which indicate that fears of labour data hinting at an economy slowdown may be far-fetched.
• For Governor Michelle Bowman, the key challenge is that even in the midst of inflation easing, it does remain concern and it would be too early to tom-tom about past achievements or rest on past laurels. For instance, headline inflation at 2.5% still remains decisively above the Fed target of 2.0%. Also, the consumer inflation and PCE inflation will face the toughest challenge in the last mile, as the experience of early 2024 has clearly testified. More importantly, there are signs of core inflation making a comeback; and it has already risen by 30 bps in the last 2 months. These data points cannot be ignored. Also, the sharp fall in crude oil prices does not adequately reflect the strife in the Middle East and West Asia.
• According to Bowman, higher prices have an outsized impact on the most vulnerable lower and moderate income households. According to Bowman, the mission of returning to low and stable inflation of 2% is the sine qua non to foster a strong labour market and an economy that works for everyone in the longer term. In short, if inflation were to return, it is these vulnerable segments of the economy who would be the worst hit.
• According to Bowman, there is also a larger perception issue. For instance, there has definitely been meaningful progress on lowering inflation, but the core inflation remains around or above 2.5% and is showing a rising trend. More important are two perception issues. Firstly, Committee’s larger policy action of cutting rates by 50 bps could be interpreted as a premature declaration of victory on the price stability mandate. Secondly, should inflation return, there would also be a spike in expected inflation, another perception that the Fed seeks to continually monitor and manage.

According to Michelle Bowman, the Federal Reserve is yet to achieve its avowed inflation goal. Hence, a more cautious and calibrated approach would be able to avoid unnecessarily stoking demand. The next few weeks could decide future trajectory of rates and the future strategy of the US Federal Reserve.