Fed Minutes: Members Saw Increased Downside Risks to Economy

At its September meeting, Federal Reserve officials began debating how far their current interest-rate cutting campaign should extend, even as they agreed to lower rates in response to growing risks to the U.S. economy.
James Hyerczyk
U.S. Federal Reserve

A quick read of the Fed minutes from its September meeting showed that some Federal Open Market Committee (FOMC) members expressed concern that the financial markets may be expecting more rate cuts than the central bank will deliver.

At its September 17-18 monetary policy meeting, the FOMC approved a quarter-point rate cut, putting the overnight funds rate in a target range of 1.75% to 2%.

The minutes also showed sharp divisions among members about the future path of policy, along with some worry that a market clamoring for easier monetary might be getting ahead of itself. The minutes said that “a few participants” at the September meeting said prices in futures markets “were currently suggesting greater provision of accommodation at coming meetings than they saw as appropriate.”

As of Wednesday’s close, traders were pricing a 93.5% chance of a rate cut at the end of October, following cuts in July and September. The financial markets are also predicting more reductions in 2020.

Because of the potential misunderstanding, “it might become necessary for the Committee to see a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path,” the minutes said.

Debate Over How Far to Extend Rate Cuts

At its September meeting, Federal Reserve officials began debating how far their current interest-rate cutting campaign should extend, even as they agreed to lower rates in response to growing risks to the U.S. economy.

“Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad.”

Future Cuts and Policy Limits Discussed

Several policymakers wanted the FOMC’s statement to signal the limits of the policy easing that Chairman Jerome Powell characterized in July as a “mid-cycle adjustment.”

“Several participants suggested that the committee’s post-meeting statement should provide more clarity about when the recalibration of the level of the policy rate in response to trade uncertainty would likely come to an end,” the minutes said.

Risks to the Economy

At its last policy meeting, members repeatedly expressed concerns about the impact tariffs were having on business activity. They said that while they saw U.S. growth as generally solid, the forecast risks “were tilted to the downside.”

Several members also noted that statistical models designed to gauge the probability of a recession over the medium term had increased notably in recent months.

“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 said.

“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 continued.

Officials also pointed out that “a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged” and members were also watching the yield curve inversion, a reliable indicator that a recession is ahead.

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