There is a British proverb: Where there are rules, there are exceptions. Relative to the convention of starting with a 25 basis point adjustment, the Federal Reserve's larger 50 basis point rate cut last month was clearly an exception that attracted attention. The minutes of the September interest rate meeting released on October 9th showcased the discussions at the time, and observers have noted that the level of disagreement during the meeting was actually greater than what the formal voting results of the decision indicated, meaning that more than one person was in favor of a 25 basis point rate cut. Combining this with the Federal Reserve's decision-making logic allows for further analysis.

Firstly, this decision once again highlights the paramount importance of employment. In the United States, employment is of utmost importance, and all systems and policies serve it. In the Federal Reserve's dual mandate, maximum employment is also at the forefront. The price stability, or inflation target, which comes after, is a necessary condition for sustainably achieving maximum employment; when inflation is high, employment targets can be temporarily sacrificed to reduce inflation, but ideally, both should be balanced to achieve a soft landing. Once inflation subsides, employment issues must be given the utmost importance. In the summer of 2021, at the beginning of this round of inflation, the Federal Reserve misjudged and was slow to act due to its rigid adherence to employment targets, missing the opportunity. Last year, as the Federal Reserve raised interest rates, it was determined to reduce inflation even at the cost of increased unemployment and economic recession. The vast majority of academia and industry also predicted that the U.S. economy would fall into a recession, but so far, the recession has not occurred, and what is called the "perfect disinflation" of a "soft landing" is almost achieved.

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Since the second half of last year, as inflation continued to decline, the Federal Reserve has paid increasing attention to employment issues, repeatedly stating that "if the labor market deteriorates unexpectedly, the Federal Reserve is always ready to take measures." In December last year and January this year, I wrote articles explaining that the key variable for the shift in Federal Reserve policy was employment data. Before the September interest rate meeting, based on the August CPI inflation data, plus the monthly PPI price index, the Federal Reserve estimated the August PCE price index at 2.2%, and the core PCE at 2.7%, which was consistent with the data released afterwards. Although the core PCE increased by 0.1 percentage points compared to the previous month (which was one of the reasons for Federal Reserve Governor Bowman's dissenting vote), the Federal Reserve's decision was based on the overall PCE price index, not the core PCE. 2.2% is already close to 2%, and the Federal Reserve's inflation target can be said to have been basically achieved, and "almost all participants" believe that the risk of further increases is diminishing. At the same time, due to the lag in policy transmission, Powell has also said many times that it is not necessary to wait for inflation to drop to 2% before cutting rates. It is with this confidence, and with the lessons learned and being more cautious, that the Federal Reserve, especially Powell, has "great confidence" in achieving the inflation target and dares to cut rates by 50 basis points at once. This is precisely to prevent further cooling or deterioration of employment when it is still relatively stable, ensuring the rare "soft landing."

Secondly, this decision is both preventive and compensatory. After the Federal Reserve's September interest rate meeting, it was widely believed that the Federal Reserve's initial 50 basis point rate cut aimed to protect the job market and prevent the economy from slowing down too quickly or even falling into a recession. Powell said at the press conference: "The time to support the labor market is when it is strong, not when layoffs begin." As of August, the U.S. economy is still growing, employment is good but the number of new jobs is decreasing, the unemployment rate is rising but still at a historical low, employment has not deteriorated, and there are no signs of a recession. But more importantly, the trend is that once unemployment increases, it is easy to accelerate and difficult to reverse in a short period of time. The minutes show: Looking at the prospects for the labor market, participants pointed out that it seems that further cooling is not needed to help inflation return to 2%; some participants pointed out that as the labor market eases, continued easing may turn into a more serious deterioration, and this risk is increasing. Therefore, the 50 basis point rate cut is a clear and firm stance to show the determination to support employment and prevent deterioration.

According to the minutes, "some participants pointed out that there was a reason to cut rates by 25 basis points at the last meeting," and the data released afterwards proved this point. The July employment data released shortly after the July interest rate meeting, coupled with the Bank of Japan's rate hike, also caused a significant global stock market turmoil, and the Federal Reserve was criticized for being late in cutting rates and lagging behind the curve. Therefore, this 50 basis point rate cut is also a compensation and compromise, indicating that the Federal Reserve is not lagging behind the curve.

Finally, looking at the necessity and rationality of this decision. On the one hand, the level of interest rates is important, but the direction of interest rate changes is more important. Whether it is a 25 or 50 basis point rate cut, the substantive difference is not significant; the key is the expectations of businesses and households for rate cuts. The minutes state: "A few participants pointed out that in determining the degree of policy restriction, what is more important is the overall path of policy normalization, not the specific amount of initial easing at this meeting." On the other hand, a detailed and in-depth examination in conjunction with subsequent economic data can reveal some differences. The strong September employment data indicate that the cooling of employment in July and August was also seasonal and temporary, and the number of new jobs added in these two months was also significantly revised upwards, the unemployment rate decreased, and the average hourly wage year-on-year growth increased from the previous 3.8% to 4%, the largest increase since May this year, indicating that even with temporary factors such as weather, employment at the time did not show a significant cooling. Combined with other economic data such as the September manufacturing PMI index and the service industry PMI index, the overall economic growth in the United States is still relatively robust, all indicating that a significant rate cut is not very necessary.

Because of this, since the September interest rate meeting, Federal Reserve officials and the minutes have emphasized that a larger rate cut should not be seen as a signal of concern about the economic outlook, nor should it be seen as a signal that the Federal Reserve is preparing to cut rates quickly; it emphasizes that the next step is not to rush to cut rates, and there are even statements that the November interest rate meeting may pause rate cuts. If this is the case, then the last 50 basis point rate cut seems to lack rationality. Of course, it is also difficult to make completely accurate judgments and decisions. In response to this issue, participants emphasized the importance of communication, demanding clear communication that the committee's monetary policy decisions depend on the evolution of the economy and its impact on the economic outlook and the balance of risks, so this is not a predetermined route.