The Fed's Rate Cut Surprise: What Does a Lone Dissent Mean?

TradingKey - On Wednesday, September 17, the Federal Reserve announced an interest rate cut of 25 basis points following its September FOMC meeting, in line with market expectations. However, the voting details revealed more than the rate cut itself. 

In this meeting, only Stephen Miran, a newly appointed board member and economic advisor to Trump, dissented, advocating for a 50 basis point reduction. Previously dissenting in July, board members Christopher Waller and Michelle Bowman this time supported the 25 basis point cut.

Bloomberg analysis suggests this sends a significant signal about maintaining central bank independence.

Given that both Waller and Bowman were appointed during Trump's first term, they have been seen as enforcers of Trump's will and potential candidates for the next Fed Chair. Consequently, prior to the meeting, institutions like private equity giant Apollo and ING predicted that more than one board member would support a 50 basis point cut.

Bloomberg notes that as a leading candidate for the next Chair, Waller must have known that supporting a substantial rate cut could enhance his chances, especially with Trump openly advocating for a 1% low interest rate. Yet, he refrained from doing so.

This has led to significant shifts in the betting markets for the next Fed Chair. Kalshi futures market data shows that after the decision was announced, the odds of Waller becoming the next Chair dropped from a peak of 29% to 19%, while Miran's odds rose from 10% to 16%.

Bloomberg's analysis indicates that given both board members' aspirations to become Fed Chair, their votes for the 25 basis point cut were based on what they deemed the "right decision," rather than political motivations. These actions, Bloomberg suggests, "have significance that goes beyond the race for the chairmanship. "

Moreover, the likelihood of the Fed losing its independence and being 'taken over' by the White House might be less than market expectations, and the risk of future monetary policy being overly politicized has significantly diminished.