Some Federal Reserve policymakers expressed concern in their latest meeting that markets are anticipating more rate cuts compared to the central bank plans to deliver, according to minutes published Wednesday.
The Federal Open Market Committee approved a quarter-point rate cut in the Sept. 17-18 assembly, putting the overnight funds rate in a target range of 1. 75% to 2%.
But documents released after the meeting also revealed sharp divisions among members about the future path of policy.
Minutes amplified these concerns, along with some worry that a market clamoring for easier monetary policy may be getting ahead of itself. The summary stated that “a few participants” in the September meeting stated prices in futures markets “were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate.”
As things stand, markets are greatly betting that the Fed will follow up its rate reductions of July and September with another in October. Markets also see more discounts along how 2020.
Due to the possible misunderstanding, “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,” the minutes stated.
What they left from announcement
Additionally, the minutes noted that “several” participants believed the committee, in its own post-meeting statement, should offer some guidance about how long the Fed would stay accommodative because of concerns over tariffs. The last announcement did not include that sort of language.
The “dot plot” of member expectations published at the meeting revealed that five members preferred the Fed not devoting any additional cuts this year following the latest move, five seeing a rise ahead, and seven desiring an extra cut.
The last tally one of the 10 voting members watched three dissents from Fed presidents — Eric Rosengren of Boston and Esther George of Kansas City, who preferred holding the line, and James Bullard of St. Louis who desired a half-point cut. That indicated the most dissenters since December 2014.
In justifying the cut, Fed officials cited concerns over slowing global growth spilling to the U.S., the consequences in the U.S-China trade warfare, and persistently low inflation which was running under the Fed’s 2 percent target.
Trade a concern
Minutes revealed that commerce was the overriding concern. The problem garnered 28 cites in the record, with members expressing concerns regarding the impact tariffs were having on business activity.
Members stated that while they saw U.S. expansion as generally solid, the prediction risks “were tilted to the downside.”
“Important factors in that assessment were that international trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed,” the minutes stated.
“In addition, softness in business investment and manufacturing so far this year was seen as pointing to the possibility of a more substantial slowing in economic growth than the staff projected. The risks to the inflation projection were also viewed as having a downward skew, in part because of the downside risks to the forecast for economic activity,” the summary lasted.
Officials also noted that “a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged” and associates were watching the yield curve inversion, a reliable indicator that a recession is beforehand.
Nevertheless, members noted present conditions remain strong, with “robust” intake and an employment image that continued to improve.
People who preferred holding the line concerned about financial stability risks that low interest rates posed. Others also stated concern that cutting rates now would leave the Fed little wiggle room the next time a recession emerged.
Fed officials also discussed the current mad in overnight lending markets which led to a spike in short-term prices. The central bank dealt with the matter with different temporary liquidity actions directed at stabilizing the market.
Members stated future discussions about the right size of bank reserves would be appropriate.
In a speech Tuesday, Fed Chairman Jerome Powell said the central bank probably will begin repurchasing Treasury bills as part of a move to increase the balance sheet and reservations. Members also suggested looking into a standing repo facility to deal with funding difficulties.
The minutes stressed, as did Powell, the value of distinguishing that sort of balance sheet growth in the quantitative easing programs the Fed used during and after the financial crisis.