What to make of the Fed’s surprisingly aggressive rate cut

The Fed’s decision on Sept. 18 to begin its easing cycle with a large 50-basis-point rate cut was a bit of a dovish surprise to many people—including me. But only a bit. In the days leading up to the meeting, outside opinion was close to evenly divided between a traditional 25-basis-point opener and an aggressive 50. The choice looked close enough to a coin flip that neither outcome would have been a big surprise to Fed watchers. I favored 50 basis points but guessed that the more cautious committee would opt for 25.

So what did this little surprise teach us about the FOMC, and especially about the attitudes of Chairman Jerome Powell? Three things.

First, Mr. Powell, whose opinion matters most, didn’t see the choice as a coin flip. He really wanted to start with 50 basis points and, I’m guessing, he pushed the committee in that direction. I base this guess partly on his surprisingly frank Jackson Hole, Wyo., speech but even more on the dissent by Michelle Bowman—the first by a Fed governor since 2005.

Mr. Powell certainly would have known that she would dissent against 50 basis points but not against 25. He prizes consensus and tries to avoid dissents. Yet, when the choice came down to 25 basis points with unanimity versus 50 with one dissent, he opted for 50. That tells you something.

One thing it might tell you is that Mr. Powell doesn’t want the Fed to be late again. The FOMC has been criticized for waiting too long after inflation started to rise before starting to raise rates in March 2022, and Mr. Powell doesn’t want history to record that it was late again in 2024. Remember, there are long lags between changes in interest rates and changes in inflation.

Second, as the FOMC surveyed the economic landscape, including both the state of the economy and its own policy rate (which was 5.25% to 5.5% before the September meeting), it concluded that the employment part of its dual mandate was in greater peril than the inflation part. This is despite its Sept. 18 statement claiming that “the risks . . . are roughly in balance."

Why do I say this? To be sure, neither of these two risks looks either large or imminent right now. The 12-month inflation rate, as measured by the Fed’s preferred personal consumption expenditures price index, has decreased from a peak of 7.1% in June 2022 to 2.5% at the latest reading, leaving the Fed within shouting distance of its 2% target.

The unemployment rate, which bottomed out at 3.4% in January 2023, has drifted slowly back up to 4.2%. But that’s still gratifyingly low by historical standards and happens to match precisely the Fed’s current estimate of the unemployment rate corresponding to “full employment."

Put these inflation and unemployment numbers together, and the Fed has just about achieved the legendary “soft landing." But one important variable remains out of whack: the Fed’s policy rate. Even after the 50-basis-point cut, the real federal-funds rate stands around 2.4% (4.9% minus 2.5% inflation). While estimates differ, almost no one believes the “neutral" funds rate—commonly called r*—is that high. The Fed’s own median estimate is 0.9%. So by that crude measure, it still has about 150 basis points of rate-cutting to go—and more if inflation keeps falling.

Third, opting for the more aggressive 50 basis points tells us that Powell and company weren’t cowed by Donald Trump. The FOMC isn’t a politically attuned bunch, and its decisions aren’t politically motivated. But members had to know Mr. Trump would be unhappy with the larger rate cut and would likely accuse them of putting a thumb on the scale in favor of Kamala Harris. The former president did that, but in highly muted fashion by Trump standards. His attention seemed to be elsewhere (maybe in Springfield, Ohio?).

In any case, Mr. Powell certainly understands, as Mr. Trump may not, that a September rate cut will have only minimal effects on the economy by November.

Before last week, I wondered whether the Fed would cut rates again on Nov. 6. That’s the day after Election Day, and we may not even know who won by then. Political tensions will likely be running high—or worse. In an environment like that, the Fed would rather keep its head down.

But given the Sept. 18 decision, another rate cut on Nov. 6 now seems likely—unless the data dictate otherwise.

Mr. Blinder is a professor of economics and public affairs at Princeton. He served as vice chairman of the Federal Reserve, 1994-96.