LONDON: As recently as two and a half months ago, most U.S. central bankers didn't see an interest rate cut in the cards at their Sept. 17-18 meeting.
By the end of last month, when Federal Reserve Chair Jerome Powell said it was time to start lowering borrowing costs, nearly all of his colleagues thought so too.
In large part, that was because a wide range of data moved in one direction. That pushed Fed policymakers to reassess the risks to their outlook, including whether their chief concern should be persistent inflation, labor market weakness, a deterioration in business or household financial conditions, a potential policy mistake, or some combination of those factors.
"It's not one thing that causes everyone to move. It's different people focus on different data, different indicators, different risks, and then they all end up in the same place," said Kristin Forbes, an economics professor at MIT's Sloan School of Management and a former member of the Bank of England's policy-setting committee.
Speaking on the sidelines of the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming, last month, where Powell declared the time had come for U.S. rate cuts, Forbes said: "And that's where a good (Fed) Chair can bring people together to get the outcome they want, but often by drawing on different motivations to get different people there."
At least a couple of Fed policymakers appear to still be on the fence, their support for policy easing contingent on further signs of a slowdown in inflation or weakness in the labor market.
But for the vast majority of Fed policymakers, a first reduction in rates after a grueling inflation fight is all but a certainty this month. Incoming information, buttressed by their view of data already seen, will shape how big a move they favor at the meeting in two weeks: A typical quarter-percentage-point cut or an up-sized half-percentage-point move.
Fed policymakers have not unfurled a "mission accomplished" banner to celebrate victory over what two years ago was the highest inflation rate in 40 years.
But they do believe price pressures, after gaining steam earlier in 2024, are now cooling, with month-over-month inflation slowing over the past three months to an annualized rate below the Fed's 2 per cent target.
"I am more confident that the trajectory is there," Boston Fed President Susan Collins told Reuters last month in Jackson Hole.
At the same time, Collins views the labor market as still healthy, and she continues to hear from people across New England about the toll inflation is taking. That combination, she said, means "a gradual, methodical approach" to rate cuts makes sense.
Her view - a growing conviction in ebbing inflation, along with little alarm over slowing job gains - is shared by other colleagues, including Philadelphia Fed President Patrick Harker, who told Bloomberg Radio last month that he wants a "methodical" pace for rate cuts that would "start with 25" basis points.
Labour market tipping point
San Francisco Fed President Mary Daly, a labor economist by training, is likewise comforted by receding price pressures but appears to see nothing but downside risks on employment.
Last week, Daly said she hadn't seen any deterioration yet in the labor market. Still, she warned only a month ago that "it's extremely important" not to let the labor market tip into a downturn, and said more aggressive action would be warranted if that starts to happen.
One metric Daly closely tracks is data that shows the cooling in the labor market so far is driven by slower hiring, not a pickup in layoffs.
Richmond Fed President Thomas Barkin calls it a "low-hiring, low-firing mode."
"That doesn't feel like something that's going to persist," he said in a Bloomberg podcast last month, "and so it's going to move left or it's going to move right."
Fed Governor Adriana Kugler, who is also a labor economist, told the Jackson Hole conference the tipping point may already have been reached, with the number of job openings per job seeker dropping to a level beyond which unemployment, now at 4.3 per cent, could be expected to jump.
It's a point that Fed Governor Christopher Waller also tracks closely. He has not spoken publicly about monetary policy since before the central bank's meeting in late July, but is scheduled to give an update on Friday after the U.S. Labor Department publishes its employment report for August.
Voices on the ground
Atlanta Fed President Raphael Bostic for months had said he thought the central bank would need to cut rates just once this year, and not until the fourth quarter.
Like many of his colleagues, he has seen inflation come down faster than expected. In late August, Bostic told Yahoo! Finance that he now wants to cut rates sooner than he had earlier forecast to prevent "undue damage" in the job market. Another reason for his change of heart: What business leaders are telling him.
"There were contacts in my district who were telling me that we should do something in July ... in January, nobody was saying that," Bostic said.
And though it wasn't a vast majority of contacts calling for relief before the Fed's last meeting, Bostic said he plans to keep talking with contacts about how the outlook is playing out on the ground, not just in government data.
The latest consumer confidence surveys show a deterioration in sentiment about jobs that historically tracks with rising unemployment.
Chicago Fed President Austan Goolsbee offers yet another argument for cutting rates: the Fed's targeted year-over-year inflation measure has dropped, to 2.5 per cent in July from 3.3 per cent a year earlier, even as the Fed has kept its policy rate steady in the 5.25 per cent-5.50 per cent range.
The expanding gap between those rates means borrowing costs have gotten steadily more expensive in real terms - an appropriate squeeze if the economy is overheating, but an excessive choke if it is not, Goolsbee believes. That may be even more so if, as he said in late August, the job market is already cooling "by almost all measures."