By Howard Schneider

WASHINGTON (Reuters)

A substantial majority of U.S. Federal Reserve officials last month supported a half-point rate cut to initiate easier monetary policy. However, there was consensus that this initial decision did not obligate the Fed to a specific pace of future rate reductions, as shown in the minutes of the two-day policy meeting released on Wednesday.

The minutes detail the varied opinions within the Fed, highlighting that a rate cut of this magnitude is typically reserved for situations where the central bank is concerned about a rapidly slowing economy. The rate cut received a single dissenting opinion from Board member Michelle Bowman, while “some” participants suggested a quarter-point cut and “a few others” indicated potential support for such a decision.

Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted that the minutes present a “slightly more cautious picture” of the Fed's rate-cutting approach, suggesting broader unease surrounding the 50 basis point cut.

Despite some policymakers favoring a quarter-point cut, they agreed to the larger reduction to align with falling inflation rates without committing to future cuts.

Greg Daco, Chief Economist at EY, commented that Fed Chair Jerome Powell likely played a significant role in convincing a majority that a catch-up rate cut was optimal, pushing away from a methodical easing approach.

Powell reaffirmed his aim to maintain a low unemployment rate, describing the rate cut as a “strong” beginning to policy easing, emphasizing that “the path of policy normalization” is more important than the immediate amount of easing.

Notably, only 12 of the Fed's 19 policymakers are eligible to vote at a meeting, while the others participate in debates non-voting.

Supporters of the half-point cut argued that this adjustment would better reflect current indicators for inflation and the labor market. During the Sept. 17-18 meeting, the Fed lowered the benchmark policy rate from 5.25%-5.50% to a range of 4.75%-5.00%, noting that there was a valid case for cutting rates earlier in July.

The release of the minutes resulted in a rise in U.S. stocks and a strengthening of the dollar against a basket of currencies, while Treasury yields experienced slight adjustments.

BALANCING THE RISKS

Investors speculated on a potential quarter-point rate cut in the Fed's next November meeting. U.S. inflation has sharply decreased from levels observed in 2022 and 2023, nearing the Fed's 2% target despite a relatively strong economy. Policymakers emphasized the importance of not losing sight of this while acting on the rate cut.

However, the labor market's stability raised concerns for Fed officials, as they noted recent increases in unemployment and subpar job and inflation data for July and August. Rate cuts may continue as long as inflation drops, with the pace and endpoint contingent upon future economic developments.

Post-meeting economic projections indicated that nearly all policymakers expected at least 75 basis points of cuts this year, a vision not limited by initiating with a 50 basis point reduction. Recent job data showed employment growth recovery and declining unemployment, enhancing previous payroll gains for July from 89,000 to 144,000, reflecting a better economic outlook than previously indicated, which may have influenced future rate cut considerations.