When the Federal Reserve cut interest rates in September for the first time this year, the decision appeared near-unanimous: 11 members voted for the quarter-point reduction, with only one dissent.
But minutes from that pivotal Sept. 16-17 meeting, released Wednesday, reveal a central bank far more divided than the lopsided vote suggested. They show a central bank torn between members who see inflation as largely vanquished and those who believe the fight has “stalled,” and split on whether the economy needs a gentle policy adjustment or aggressive stimulus.
The disagreements raise questions about the Fed’s ability to navigate what officials themselves acknowledge is an unusually uncertain economic landscape, one complicated by this year’s tariff increases, immigration restrictions, and the potential impact of artificial intelligence on labor markets.
Most striking was the explanation for the sole dissent. Stephen Miran, a newly appointed Fed governor who was sworn in the morning of the meeting, immediately broke with Chair Jerome Powell and argued for a half-point cut instead, twice the size approved by his colleagues. Governor Miran’s reasoning offered a theory that contradicts the conventional wisdom inside the Fed, demonstrating that President Trump’s latest appointment has increased the diversity of views at the central bank.
He contended that “the neutral rate of interest had fallen due to factors such as increased tariff revenues that had raised net national savings and changes in immigration policy that had reduced population growth,” according to the minutes. In other words, policies typically viewed as inflationary may have actually made the Fed’s current stance more restrictive than policymakers realize.
The dissent on Miran’s first day is highly unusual. New governors typically take months before breaking with the chair, if they ever do. His economic reasoning is also heterodox, running counter to how most Fed economists view tariffs and immigration restrictions.
Inflation: Solved or Stalled?
The minutes reveal the committee’s inability to agree on a fundamental question: Is inflation essentially under control?
The divergence is stark. “A couple of participants” said that excluding the effects of tariffs, inflation would be “close to target,” the minutes show. The implication: The Fed’s 2 percent goal is within reach.
But “a few other participants” emphasized that progress toward 2 percent had “stalled, even excluding the effects of this year’s tariff increases.” That view suggests a more persistent problem requiring continued tight policy.
It is the same data, viewed through different lenses, reaching opposite conclusions.
The Fed officially targets a two percent annual inflation rate, as measured by the Dept. of Commerce’s personal consumption expenditure price index. Both camps are looking at inflation that remains at 2.7 percent to 2.9 percent but cannot agree on whether that represents the last mile of a successful inflation fight or evidence that underlying price pressures remain entrenched.
“A majority” of participants emphasized upside risks to inflation, worried that price pressures could prove more persistent than expected or that long-term expectations could drift higher after an extended period of elevated inflation. But “some” participants said they perceived less risk than earlier in the year.
The disagreement matters because it determines whether the Fed should be cutting rates at all, and if so, how quickly.
A Jobs Market Weaker Than Anyone Knew
Compounding the uncertainty is the fact that Fed officials learned just prior to the meeting that the labor market was significantly weaker than policymakers realized when they were making decisions earlier this year.
The Bureau of Labor Statistics’ preliminary benchmark revision, released on Sept. 9, indicated that the level of payrolls for March was more than 900,000 lower than had been reported. The minutes note that “a few participants” pointed to this revision, along with other recent data adjustments, as evidence “that labor market conditions had been softening for longer than was previously reported.”
In other words, nearly a million jobs that officials thought existed when they were holding rates steady earlier this year did not actually exist. The Fed had been making policy based on an overly sunny view of the labor market.
Yet despite that significant data revision and an unemployment rate that had risen to 4.3 percent, most other labor market indicators “did not show a sharp deterioration,” according to the general assessment of participants. Wage growth was moderating, but quits and layoffs remained stable.
The mixed signals have left policymakers uncertain about whether the job market is experiencing a healthy normalization or sliding toward something more troubling.
The Pace of Cuts: Another Fault Line
While “most” participants judged that further rate cuts would likely be appropriate over the remainder of the year, the minutes reveal that some members saw merit in not cutting at all.
“A few participants stated there was merit in keeping the federal funds rate unchanged at this meeting or that they could have supported such a decision,” the minutes show. These members expressed concern that “longer-term inflation expectations may rise if inflation does not return to its objective in a timely manner.”
That means the policy options actually under consideration at the meeting spanned a 50-basis-point range: from no cut at all to Mr. Miran’s preferred half-point reduction.
The disagreement stems partly from differing views on how restrictive current policy actually is. “Some participants noted that, by several measures, financial conditions suggested that monetary policy may not be particularly restrictive,” the minutes said, pointing to stock markets near record highs and very tight corporate credit spreads.
If policy is not particularly restrictive, these members asked, why cut aggressively? Others, like Miran, clearly believe policy is more restrictive than it appears — especially if the neutral rate of interest has fallen as he contends. In a speech given after the meeting to the New York Economic Club, Miran detailed his views on why the neutral rate is far lower than many economists think and why policy is more restrictive than other Fed officials have indicated.
A Committee Flying Blind
The extended discussion of risk management in the minutes reveals officials grappling with genuine uncertainty about what might go wrong.
If “policy were eased too much or too soon and inflation continued to be elevated, then longer-term inflation expectations could become unanchored and make restoring price stability even more challenging,” the minutes warned. But “if policy rates were kept too high for too long, then unemployment could rise unnecessarily, and the economy could slow sharply.”
Fed officials have always faced these trade-offs. What’s different now is their explicit acknowledgment of uncertainty. “Participants expressed a range of views about the degree to which the current stance of monetary policy was restrictive,” the minutes stated — a remarkable admission that committee members cannot agree on this fundamental question.
The sources of uncertainty are numerous: structural changes from artificial intelligence adoption, the economic effects of tariff increases and immigration restrictions, and questions about productivity growth that “a few” participants believe may be holding down inflation.
Several participants noted that business contacts indicated plans to raise prices because of higher input costs from tariffs. But others pointed to potential productivity gains that could offset those pressures. Still others noted that reduced immigration could lower both demand and inflation.
The divisions within the committee could lead to increased volatility in policy decisions and communications as officials react to incoming data without a clear consensus on the economic outlook.
The Fed faces a particularly delicate moment. Inflation remains above target, but the labor market shows signs of softening. Financial conditions remain loose even as officials try to slow the economy. And the economic effects of major policy changes — on trade, immigration, and technology — remain highly uncertain.
Mr. Miran’s willingness to dissent on his first day and to have his heterodox theory formally recorded under his name may signal a new era of more explicit divisions within the committee.
For now, officials continue to insist that “monetary policy was not on a preset course and would be informed by a wide range of incoming data, the evolving outlook, and the balance of risks.”
But the minutes make clear that committee members are looking at that data and reaching starkly different conclusions about what it means and what to do about it.
That uncertainty is likely to persist at least through the end of the year, when officials will decide whether to follow through on the additional rate cuts that “most” — but notably not all — believe will be appropriate.
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