Why the Fed won’t have a unanimous decision in September

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The country appears divided and so does the Federal Reserve.

On one side, the economy is performing above trend, inflation is tame and unemployment is low. Those in favor of rate cuts look at a weak manufacturing sector and global economic woes,

Should the Fed decide to cut interest rates next month, there will probably be two dissenters again — the same two: Federal Reserve Bank of Kansas City President Esther George and Federal Reserve Bank of Boston President Eric Rosengren.

In a statement after the meeting, George said, “In my view, incoming economic data and the outlook for economic activity over the medium term warranted no change in the policy rate.” The slowdown in growth, “is in line with my outlook,” and with “record low unemployment, and a benign inflation outlook, maintaining the Committee’s policy settings at 2.25-2.5 percent would have been appropriate, in my view.”

While she acknowledges “crosscurrents emanating from trade policy uncertainty and weaker global activity,” she said she would need to see data indicating further economic weakness before considering adjusting policy.

Rosengren said he doesn’t “see a clear and compelling case for additional monetary accommodation at this time,” based on eight points, including low unemployment, moderate inflation and above-potential economic growth.

And those two aren't the only Fed presidents who would vote against a rate cut, just the only dissenters with a vote this year. Not that it matters, because they would be the minority vote against a rate cut. It’s possible, based on their statements, that five or six others don’t think cutting rates now is a good idea.

President Trump tweeted this week that the Fed should cut rates by a full percentage point, or more. Such a move would be unprecedented with GDP, inflation and unemployment where they are. Plus, the Fed needs to be careful because they don’t have much ammunition should recession arise. The fed funds rate target is currently 2% to 2.25%.

“President Truman requested a ‘one-handed economist’ after complaining that ‘all my economists say, on one hand … and on the other,’ ” said KC Mathews, EVP, chief investment officer at UMB Bank. “This historic request now describes the current economic environment that leads to a divisive FOMC. The bond market has been suggesting a doomsday economy, the stock market is predicting modest economic and earnings growth, and the underlying economic fundamentals are forecasting a slowing economy.”

Given these diverse readings, “It’s not surprising that the Fed is split on what to do with interest rates,” he said. If the Fed heeds only one of these barometers, its “course of action becomes clear. If you believe the bond market — lower fed funds. If the stock market is right — keep rates stable and be patient. And if you look at the economic fundamentals — rates should be stable to slightly higher.”

But the Fed needs to “consider all relevant data,” which makes it “challenging,” Mathews said.

The divide of opinions “isn’t a negative,” he said. “It tells me the process is working, Fed [participants] can speak their minds, disagree and have an open dialogue on interest rates and economic conditions.”

And, while presidents have their stated opinions, it’s possible their vote can be swayed.

“Until we hear from Chairman Powell himself, it is reasonable to expect that FOMC members will be keeping something of an open mind about what the Fed should do at the September meeting,” according to Mark Hamrick, senior economic analyst at Bankrate.com. “Even so, given the amount of time between now and then, Powell himself might want to keep his options open.”

Certainly, a case can be made that policy should be unchanged. “The case for holding off on another rate cut resolves around the perceived strength of the American consumer, particularly given the better-than-expected recent retail sales report,” Hamrick said. “That is buttressed by a low unemployment rate.”

The weakening global economy, especially in manufacturing, supports the need for a rate cut.

“This is a highly dynamic time for the economy and for monetary policy,” Hamrick added. “One needs only recall how different conditions were last December when the short-lived expectation was that we’d see rising rates through 2019. Virtually no one foresaw a sharp drop in yields coming along with the Powell pivot to, first, holding the line on rates, and then the quarter-point rate cut in July.”

The Federal Reserve Bank of Philadelphia's August Nonmanufacturing Business Outlook Survey suggested "continued expansion" although the general business activity index slumped to 7.5 from 21.4 in July, while sales/revenues climbed to 28.5 from 22.5. In a read of expectations for six months from now, the general activity index slumped to negative 0.7 from 21.8.

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Monetary policy Economic indicators Federal Reserve Federal Reserve Bank of Boston Federal Reserve Bank of Kansas City FOMC