Fed split on rate cut

Marco Green
October 10, 2019

While all had generally become more concerned with risks associated with the Trump administration's escalating trade wars, particularly with China, slowing global growth and other developments such as Brexit, they differed on what that meant for the USA economy.

Several policymakers felt it would be prudent for the Fed to cut rates now to guard against risks while several others said the current USA economic outlook did not justify a rate cut. "Furthermore, as they did not believe that these uncertainties would derail the expansion, they did not see further policy accommodation as needed at this time".

Powell noted recent data revisions showed less job growth in the year to March than previously estimated, turning a "booming" market into one of moderate growth.

The Fed has lowered borrowing costs twice this year after having raised interest rates nine times since 2015 and the minutes tally with projections that accompanied the September statement, which showed discord among policymakers on the path forward.

Plus, documents showed that a few participants anxious about the expectations formed by markets "currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate and that it might become necessary for the Committee to seek a better alignment of market expectations regarding the policy rate path with policymakers' own expectations for that path".

Powell did not go so far as to even flag another rate cut upcoming. The Fed's benchmark rate now stands in a range of 1.75% to 2% with the next meeting coming on October 29-30. But the other two called for keeping the rate unchanged.

Minutes from the September 17-18 Federal Open Market Committee meeting published Wednesday revealed a sharp division among policymakers over the decision to cut the benchmark federal funds - the second time the USA central bank did so this year.

American central bankers have grown more fearful, saying a global slowdown and President Donald Trump's trade wars could drag down hiring and the broader economy with it, meeting minutes showed Wednesday.

"Participants generally had become more concerned about risks associated with trade tensions and adverse developments in the geopolitical and global economic spheres", according to the minutes.

The minutes showed that among the options discussed would be to allow the Fed's balance sheet to grow again.

Consumer spending, which has been driving USA growth, has also begun to moderate. The Fed had been reducing its holdings that had surged to a peak of $4.5 trillion in the wake of the Great Recession as it engaged in several rounds of bond purchases aimed at lowering long-term rates and giving the economy a boost. Closely watched reports on manufacturing, services and payrolls all came in weaker than expected, though hiring was still enough to push the US jobless rate down to a half-century low of 3.5 per cent.

Powell also used his speech to let markets know the central bank would soon begin allowing its balance sheet to expand to ensure smoother functioning of US short-term funding markets. Rates in the $2.2 trillion market for repurchase agreements, a key measure of liquidity, spiked to 10% on September 17 to levels not seen since the height of the global financial crisis in 2008 as demand for overnight cash from companies, banks and other borrowers exceeded supply.

"Several participants suggested that such a discussion could benefit from also considering the merits of introducing a standing repurchase agreement facility as part of the framework for implementing monetary policy", the minutes said.

Critics linked the turmoil with the reduction in the size of the Fed's balance sheet, which they said left the system with insufficient bank reserves to cushion the market from periods of higher cash demand or lower supply.

Other reports by Click Lancashire

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