By Nick Timiraos
WASHINGTON-Federal Reserve officials worried that weakness in
manufacturing, trade and business investment could threaten the
economic expansion by triggering cutbacks in hiring and consumer
spending when they cut interest rates last month.
"Risks to the outlook associated with global economic growth and
international trade were still seen as significant despite some
encouraging geopolitical and trade-related developments," said
minutes of the Oct. 29-30 policy meeting, which were released on
Wednesday.
At the same time, most officials thought that after making their
third rate cut last month since July, they could shift to a
wait-and-see stance to determine whether the economy would need
more stimulus in the months ahead.
"Most participants judged that the stance of policy, after a
[quarter-percentage-] point reduction at this meeting, would be
well calibrated to support the outlook of moderate growth, a strong
labor market" and stable inflation, the minutes said.
Fed officials voted at that meeting to cut their short-term
benchmark to its current range between 1.5% and 1.75%. They
modified their postmeeting statement to signal a diminished
prospect of a fourth rate cut in December.
At his news conference, Fed Chairman Jerome Powell underscored
that shift when he said officials' stance was likely to be
appropriate unless developments "cause a material reassessment of
our outlook" for moderate growth and a strong labor market.
Investors expect the Fed to hold rates steady at its upcoming
meeting on Dec. 10-11, and futures markets see a roughly 50%
probability of one more rate cut by the middle of next year,
according to CME Group.
Fed officials raised short-term interest rates four times last
year to guard against undesirable levels of inflation or financial
bubbles, but they have cut rates this year due to a slowdown in
business investment and global growth that the U.S.-China trade war
has amplified.
Hopes for a trade truce last month has boosted investors'
optimism that the economy can avoid a downturn. But the Trump
administration and Beijing have struggled to complete a partial
deal this month after reaching what the White House billed as an
"agreement in principle" on Oct. 11.
While officials at last month's meeting saw some evidence that
the risks of a recession had diminished based on the structure of
short- and long-term interest rates, officials weren't convinced
that the threats to economic growth that prompted rate cuts earlier
this year had passed entirely.
"In particular, some further signs of a global slowdown in
economic growth emerged," the minutes said, raising the risks of a
sharper downturn in household spending that has lifted U.S. output
this year.
The committee has been divided since the summer over how
aggressively to forestall potential economic weakness by reducing
rates. Two reserve bank presidents have dissented from every vote
this year to lower rates, instead preferring to leave them
unchanged.
Another three presidents without a vote have indicated that they
didn't support the decision last month. The minutes showed two
officials who supported a cut viewed it as a "close call."
Mr. Powell and other senior Fed officials have argued against
waiting to see the economy slow sharply before lowering interest
rates.
"The idea of keeping your powder dry, which is how it's often
expressed, 'Don't do things now. Save it for when you really need
it.' I think it's actually a mistake," said New York Fed President
John Williams during a moderated discussion in Washington on
Tuesday.
President Trump has criticized the Fed for not reducing rates
more aggressively this year and in recent weeks has said he would
prefer the U.S. to have negative interest rates, which have been a
feature in European countries with very low growth and inflation
prospects.
Fed officials viewed negative rates as unnecessary at last
month's meeting, the minutes said. They examined the tool as part
of a broader review of their policy strategies should the economy
weaken, leaving the Fed with rates pinned near zero, as occurred
for seven years after the 2008 financial crisis.
"All participants judged that negative interest rates currently
did not appear to be an attractive monetary policy tool in the
United States," the minutes said. Officials saw the benefits of
negative rates abroad as mixed, and they worried that introducing
negative rates in U.S. capital markets would create "significant
complexity or distortions to the financial system," the minutes
said.
But the minutes said officials didn't entirely rule out the
possibility that the Fed might need to reassess the feasibility of
the tool in the future.
Last month's meeting followed an unscheduled one via video
conference on Oct. 4 when officials discussed and subsequently
agreed on a plan to rebuild bank deposits held at the Fed, known as
reserves.
The minutes showed that there was unanimous support for their
plan, announced on Oct. 11, to buy $60 billion a month in very
short-term Treasury debt. Most officials supported the decision to
announce their plan quickly, rather than to wait until the
regularly scheduled meeting at month end, the minutes said.
The purchases are designed to eventually replace daily and other
short-term cash injections the Fed has deployed to avoid a rerun of
money market volatility that occurred in mid-September.
At the later meeting, Fed officials debated additional
approaches to maintain stable conditions in very short-term funding
markets.
One option would be to continue "relatively frequent"
money-market operations that the Fed has employed in recent weeks.
Officials also discussed implementing a new money-market facility
that would make it easier for banks to exchange reserves for
Treasury securities at all hours. They didn't reach make any
decisions last month.
(END) Dow Jones Newswires
November 20, 2019 14:15 ET (19:15 GMT)
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