JACKSON HOLE, Wyo.—With the Federal Open Market Committee meeting here this week as part of its annual retreat, newly released minutes from its July meeting show strong internal divisions over whether to cut rates.
The response in the markets is equally divided over whether the Fed will again cut rates this year, and many are looking to comments from Fed Chairman Jerome Powell, scheduled for today, for some additional direction.
The minutes of the July discussions show two of the FOMC’s members believed the Fed should cut its benchmark policy rate by a half-percentage point, double the quarter-point reduction the central bank eventually agreed upon. On the other end, some on the committee said there was no need for any rate cut at all, arguing the economy was beginning to improve after a soft patch in the spring.
"The minutes from the FOMC's July meeting reflect the divisions within the committee, with the inflation issue in particular bringing it into stark relief, " said NAFCU Vice President of Research and Chief Economist Curt Long. "Two members wanted a 50 basis point cut in July due to the persistent shortfall in inflation below the committee's target, while others thought the recent rise in inflation justified their assessment that such weakness owed to transitory factors, and therefore warranted caution in easing policy.
Two Factions
"The events since the July meeting will only drive those two factions further apart and present a real challenge for Chairman Powell as he tries to present a unified front ahead of the September meeting," predicted Long.
FOMC participants who favored the rate cut cited slower growth abroad, increasing risks to the economic outlook and the persistent shortfall in inflation.
The committee also acknowledged ongoing risks associated with trade uncertainty, with several of participants reporting that their business contacts were making decisions based on their belief that trade uncertainties would likely continue, Long pointed out.
Following the July meeting, the committee cut interest rates by 25 basis points and moved to end its balance sheet adjustment in August – two months earlier than previously indicated.
Other Revelations
Long noted that the minutes also revealed participants:
- Continued to view sustained expansion of economic activity, strong labor market conditions and inflation near the committee's symmetric 2% objective as the most likely outcomes
- Agreed that the labor market had remained strong since their last meeting
- Favored a future approach in policy that would be guided by incoming information and its implications on economic outlook, instead of following a preset course
‘The Best Guess’
The release of the minutes has left the market as divided as the FOMC itself, with some believing additional rate cuts are coming later this year, and others saying the Fed will now stand pat, in part to have something in reserve in the event of an economic slowdown.
"The best guess at this point is for another 25-basis point cut, but that is not the foregone conclusion financial markets are assuming. Friday should provide more clarity,” said Long, pointing to comments Chairman Powell is scheduled to give today.
Michael Pearce, senior economist at Capital Economics, said, "There is little sign that the Fed is willing to push back on the markets. As such, another (quarter-point) cut in September still looks like a good bet, if only because the Fed will not want to disappoint lofty market expectations."
View From Bow-Tie Economist
Dr. Elliott Eisenberg, the economist who has been a popular speaker at credit union events, said, "Despite just a thin majority of Fed interest rate setters supporting the last Fed cut, they will again cut rates in mid-September. This is because trade concerns have worsened, and more importantly, job growth for the year ending March 31 was just revised down by 42,000/month! This means despite tax cuts, the economy and job growth were meaningfully weaker than the Fed thought as they were raising rates in 2018."
The FOMC will next meet Sept. 17-18.