Fed minutes show split over July rate cut
Minutes describe July's quarter-point cut as part of an ‘ongoing reassessment’ of the policy path that began in late 2018
Washington — Federal Reserve officials viewed their interest-rate cut in July as insurance against too-low inflation and the risk of a deeper slump in business investment stemming from uncertainty over President Donald Trump’s trade war.
“Members who voted for the policy action sought to better position the overall stance of policy to help counter the effects on the outlook of weak global growth and trade policy uncertainty, insure against any further downside risks from those sources, and promote a faster return of inflation” to the 2% target, according to minutes of the July 30-31 Federal Open Market Committee (FOMC) meeting, released on Wednesday in Washington.
The Fed cut rates for the first time since 2008, a move chair Jerome Powell called a “midcycle” adjustment. The minutes described the quarter-point cut as part of an “ongoing reassessment” of the policy path that began in late 2018.
“Members generally agreed that it was important to maintain optionality in setting the future target range for the federal funds rate,” the minutes said, indicating the committee did not view the cut as part of an extended cycle of reductions.
The minutes did not shift the outlook for further rate cuts this year. January fed funds futures indicate a rate of 1.49% at the end of 2019, having indicated 1.485% just before the release. With an effective fed funds rate at 2.13%, that implies almost 65 basis points of reductions in 2019.
The Fed went out of its way to highlight the reasons for the cut in three bullet points, citing signs of economic deceleration, risk management concerns and too low inflation. The minutes said participants noted that “trade uncertainty would remain a persistent headwind for the outlook”.
FOMC participants said they still viewed a sustained US economic expansion, strong labour markets and inflation near the target “as the most likely outcomes”.
The minutes began with a lengthy discussion of the Fed’s policy strategy review, which indicated that officials are not ruling out any options, including an expansion of their policy toolkit.
Since the last meeting, the dollar has strengthened as the global economic outlook dimmed, raising the prospect for rate cuts abroad. Yields on US 10-year treasury notes have plunged towards record lows. Investors expect as many as three more quarter-point rate cuts in 2019 to offset increasing downside risks, including a move in September.
The quarter-point in July cut was controversial within the committee, with Fed presidents Eric Rosengren of Boston and Esther George of Kansas City dissenting in favour of no change, the first double dissent Powell has faced since he took the Fed’s helm in February 2018. “A couple” of participants wanted a half-point cut, the minutes said.
The chair is trying to sustain a record US economic expansion at a time when uncertainty over Trump’s trade policy is weighing on global growth.
While US data is mixed, economists remain positive on growth, with estimates showing the expansion continuing into 2021, according to forecasts compiled by Bloomberg. Retail sales in July advanced by the most in four months, while the consumer price index also rose with core prices excluding food and energy climbing 2.2% for the year.
At the same time, consumer sentiment plummeted to a seven-month low in August, raising the risk that the economy’s biggest engine may be poised to downshift.