FOMC minutes: Downside risks justified cut, then hold

Complimentary Access Pill
Enjoy complimentary access to top ideas and insights — selected by our editors.

Potential downside risks from “global developments” persuaded most members of the Federal Open Market Committee to vote to cut the benchmark interest rate in October, and then to hold it. “A couple” of members who supported one last cut, to a range of 1.50% to 1.75%, termed it “a close call relative to the option of leaving the federal funds rate unchanged,” according to minutes of the meeting, released Wednesday.

federal-reserve
In a string of enforcement actions issued Thursday, the Federal Reserve barred one former banker from the industry for misappropriating confidential supervisory information and fined three others for misappropriating internal bank records.

“Many participants judged that an additional modest easing at this meeting was appropriate in light of persistent weakness in global growth and elevated uncertainty regarding trade developments,” the minutes said. “Nonetheless, these participants noted that incoming data had continued to suggest that the economy had proven resilient in the face of continued headwinds from global developments and that previous adjustments to monetary policy would continue to help sustain economic growth.”

Some participants believed a 25 basis point rate cut “would likely better align the target range for the federal funds rate with a variety of indicators used to assess the appropriate policy stance, including estimates of the neutral interest rate and the slope of the yield curve.”

After the easing, “most participants” believed monetary policy “would be well calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the Committee’s symmetric 2% objective and likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook,” the minutes say.

A “few” participants were concerned about hitting the effective lower bound and believed “providing adequate accommodation while still away from the ELB would best mitigate the possibility of a costly return to the ELB.”

Others cited the below-target inflation as a justification for a rate cut, “concerned that persistent inflation shortfalls could lead to a decline in longer-run inflation expectations and less room to reduce the federal funds rate in the event of a future recession.”

Those who wanted no change in rates “suggested that the baseline projection for the economy remained favorable, with inflation expected to move up and stay near the Committee’s 2% objective,” the minutes said. “They also judged that policy accommodation was already adequate and, in light of lags in the transmission of monetary policy, preferred to take some time to assess the economic effects of the Committee’s previous policy actions before easing policy further.”

The three cuts made by the FOMC this year are “in line with historical mid-cycle easing campaigns,” according to Sam Dunlap, managing director and senior portfolio manager at Angel Oak Capital Advisors.

The markets are pricing in about an 80% chance of a cut next year, he said. “The FOMC will be leaning more toward easing going forward given the lack of inflation in the current environment,” Dunlap said.

“Despite an extensive discussion of the short term repo lending crisis, there is still very little acknowledgement of the underlying problem of banks being incentivized to hoard cash as excess reserves at the Fed,” said Bryce Doty, senior portfolio manager at Sit Fixed Income Advisors LLC.

“The Fed acknowledges the strong labor market and stable inflation. There normally would have been no need to cut rates had it not been for the ongoing repo crisis,” he said. “They had to cut rates to have any chance of banks deciding to look to the cash markets for better yields. It looks like they will need to cut again as the excess reserves is climbing in lock step with the money being printed. In other words, they will need to knock down the rate paid on excess reserves even further to get banks to stop hoarding cash.”

For reprint and licensing requests for this article, click here.
Monetary policy Federal Reserve FOMC
MORE FROM BOND BUYER