WASHINGTON: Federal Reserve officials viewed their interest-rate cut last month as insurance against headwinds from the trade war and low inflation – reasons that look even sharper as they move toward their meeting in September.
Minutes of the Federal Open Market Committee’s (FOMC) July 30-31 meeting released on Wednesday in Washington laid out the reasons for the quarter percentage-point cut, highlighting risks to the outlook even though the US economy, for now, is performing well.
Investors fully expect another rate cut at the Fed’s Sept 17-18 meeting and further easing this year. A big clue could come from chairman Jerome Powell when he speaks today at the Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming.
“The Fed is almost certain to ratify market expectations of another easing in September, ” said Stephen Stanley, chief economist at Amherst Pierpont Securities, in a note to clients.
How far Powell can go may still be limited by divisions within the Fed despite some investors pushing for aggression. The minutes showed Fed presidents Eric Rosengren of Boston and Esther George of Kansas City favoured no change in July, while a “couple” of participants wanted a half-point cut.
“The split FOMC has made it harder for the Fed to jump ahead of the curve, ” Morgan Stanley strategists said in a report. ”Chairman Powell may still be able to clear the path for a 25 basis point September rate cut when speaking at Jackson Hole tomorrow (today), but markets have been asking for more.”
In the minutes, the case for the July cut was presented under three explicit bullet points. Here’s a look at the Fed’s arguments and what’s happened since then.
First, the Fed said the cut was to insure against a further slowing of business investment, stemming in part from a global manufacturing slump arising from trade uncertainty. One day after the Fed’s last meeting, President Donald Trump escalated his trade war by announcing additional tariffs against China. Since then, uncertainty remains high, threatening to paralyse investment decisions further.
The second reason the Fed listed was risk management, a phrase that encompasses various downside threats to the economy. One issue Fed officials underscored was that foreign central banks “had only limited policy space’’ to cut rates if growth slumped. Since the July meeting, data showed German output shrinking in the second quarter, as well as mounting concerns for a no-deal exit by Britain from the European Union.
“If anything the risks have increased since this meeting, ’’ said Laura Rosner, partner at MacroPolicy Perspectives LLC in New York. “There will be more support for pre-emptive insurance rate cuts” when officials meet next month, she said.
Fed officials’ third reason for cutting was to re-set inflation back on its 2% target. While core inflation measured by the consumer price index rose 2.2% for the year ending July, the committee’s larger concern is that the public’s longer-run price expectations are stuck below 2% because inflation has been so low for so long. “Most participants judged that long-term inflation expectations either were already below the committee’s 2% goal or could decline below the level consistent with that goal” if inflation remained too subdued, the minutes said.
Since the last meeting, the US dollar has strengthened as the global economic outlook dimmed, adding more downward pressure on prices by making imports cheaper. — Bloomberg