Fed Minutes to Show Extent of Committee Divisions on Last Month's Rate Cut
August 21 2019 - 5:59AM
Dow Jones News
By Nick Timiraos
The Federal Reserve releases the minutes of its July 30-31
meeting on Wednesday at 2 p.m. EDT, shedding more light on its
decision to cut interest rates for the first time in more than a
decade.
Officials left the door open to lower rates again but Fed
Chairman Jerome Powell disappointed investors at his postmeeting
news conference when he didn't endorse market expectations of an
aggressive series of rate cuts to follow. Here's what to watch:
Committee Cleavages
Nearly half of the Fed's 12 reserve bank presidents said they
didn't see a convincing case to cut interest rates in the run-up to
last month's policy meeting. Two of them, Boston's Eric Rosengren
and Kansas City's Esther George, had a vote and dissented from the
decision to lower the policy rate by a quarter percentage point, to
a range between 2% and 2.25%.
At the same time, there wasn't much support for a larger,
half-point rate cut at the meeting.
Mr. Powell characterized the rate cut as a "mid-cycle
adjustment" and said it wasn't the start of a "long cutting cycle"
of the type the Fed adopts in a recession or severe downturn.
The minutes will shed more light on how the rest of his Fed
colleagues viewed that assessment and on what might compel them to
consider reducing rates by more than another quarter or half
percentage point this year.
Downside Risks
Fed officials have a challenging task forecasting the economy
during a period when escalating trade tensions are weighing on
investors. Look no further than President Trump's unexpected
announcement on Aug. 1, just a day after the Fed's meeting, that he
would later this year impose 10% tariffs on $300 billion in Chinese
goods that weren't already subject to tariffs.
How Fed officials judge the need for further stimulus in the
face of trade policy uncertainty will be a key focus in the weeks
leading up to their Sept. 17-18 meeting.
Some officials supported cutting rates last month because of a
desire to boost low inflation or because long-term bond yields had
fallen below some short-term bond yields.
The minutes could offer more detail on what served as the
driving arguments for the July rate cut, which could help provide a
better sense of which of these risks would shore up support for
additional stimulus in September and beyond.
The minutes will be dated, however, because the meeting preceded
the escalation of trade tensions, which in turn sent long-term bond
yields sharply lower.
Financial Stability
Mr. Rosengren and Ms. George favored holding rates steady last
month and explained in their dissents they were concerned that
easing policy at a time of relative economic stability could fuel
asset bubbles or other financial instability.
Worries about corporate leverage have surfaced in many of the
discussions on economic policy at meetings this year. One question
is whether the decision to shift the monetary policy dials over the
last seven months from one of tightening policy to easing it might
lead officials to consider a recalibration of regulatory
policy.
The Balance Sheet
Fed officials also decided to end two months ahead of schedule
the process of shrinking their $3.8 trillion portfolio of bonds and
other assets. The portfolio, also known as the balance sheet, now
is being held steady, with the Fed slowly reducing its holdings of
mortgage bonds by letting them mature and using the proceeds to
replace those redemptions with Treasury securities.
The Fed has yet to decide when it will allow the balance sheet
to begin growing again. The minutes could reveal whether the matter
was discussed at the meeting.
Operational Matters
In June, officials discussed a proposal to devise a new market
facility to reduce volatility in the demand for reserves -- the
money banks keep on deposit at the Fed -- but didn't make much
headway in determining their next steps. Resuming this debate at
the July meeting would offer a sign of somewhat greater urgency to
pull together this facility amid concerns among some money-market
investors about potential upward pressure on the Fed's benchmark
interest rate.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
August 21, 2019 05:44 ET (09:44 GMT)
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