At Fed’s meeting, rate rise divisive

Records reveal opposing views

WASHINGTON — Federal Reserve officials were widely divided at their meeting last month when they decided to cut rates for the first time in a decade, with some arguing for a bigger rate cut while others insisted they should not cut rates at all.

The minutes of the July 30-31 discussions, released Wednesday, show that two officials believed the Fed should cut its benchmark policy rate by a half-percentage point, double the quarter-point reduction the central bank eventually agreed upon. On the other end, some Fed officials argued for no rate cut at all, believing that the economy was beginning to improve after a soft patch in the spring.

The minutes did not indicate any consensus on the pace of future cuts.

The Fed’s target rate — currently 2% to 2.25% — is already much lower than in previous economic cycles.

“Members who voted for the policy action sought to better position the overall stance of policy to help counter the effects on the outlook of weak global growth and trade policy uncertainty, insure against any further downside risks from those sources, and promote

a faster return of inflation” to the Fed’s 2% target, according to minutes of the Federal Open Market Committee meeting.

Financial markets have been turbulent since the July 31 rate cut, diving 800 points one day last week on the Dow Jones industrial average, as bad news has piled up in terms of the slowing global economy and the latest developments in President Donald Trump’s trade war with China.

Because of these developments, investors have become convinced that the central bank will follow up the July rate cut with further cuts at coming meetings. But private economists are not so sure, believing the Fed may want to save some of its rate-cut ammunition should the economy

take a serious turn for the worse.

The next committee meeting is Sept. 17-18.

The minutes provided little clarity on what the future course for rates will be, but financial markets are hoping Fed Chairman Jerome Powell may send a stronger signal about future rate decisions when he delivers the keynote address at the Fed’s annual policy conference at Jackson Hole, Wyo., on Friday.

“There is little sign the Fed is willing to push back on the markets,” said Michael Pearce, senior economist at Capital Economics. “As such, another [quarter-point] cut in September still looks like a good bet, if only because the Fed will not want to disappoint lofty market expectations.”

The two Fed officials who argued for a bigger rate cut “favored a stronger action to

better address the stubbornly low inflation rates of the past several years,” the minutes said.

The July action was approved on an 8-2 vote with Esther George, president of the Fed’s Kansas City, Mo., regional bank, and Eric Rosengren, president of the Boston Fed, dissenting and arguing that they favored no rate cut at all.

The minutes said the majority supported a quarterpoint cut, viewing it as a “midcycle adjustment,” a phrase Powell used in a news conference that caused an adverse market reaction by investors who hope the July cut will be the first in a series of rate reductions.

The minutes highlighted three main reasons for the cut, including recent signs of deceleration of the economy and concerns about persistently

low inflation. Officials also believed a rate cut would be a “prudent step from a riskmanagement perspective.”

The minutes said the Fed was worried about a slowdown in business investment and about the global head winds that are affecting Europe, Japan and other regions.

On Aug. 1, the day after the Fed’s rate cut, Trump announced that he would impose 10% tariffs on $300 billion in Chinese imports beginning Sept. 1 in an effort to force the Chinese to make more trade concessions at the bargaining table. Since that announcement, Trump has said he would postpone about 60% of those tariffs until Dec. 15 to avoid hurting American consumers during the holiday shopping season.

While consumer spending and overall economic growth are holding up in the United

States, household confidence declined in preliminary August data as Americans became less positive about the economic outlook. Some businesses are holding off on investment as the trade war fuels uncertainty.

Given that uncertain backdrop, officials wanted to make sure they “avoided any appearance of following a preset course,” minutes from the meeting show. “Members generally agreed that it was important to maintain optionality” in setting interest rates, the minutes show.

Trump, who has criticized the Fed’s decision to raise rates last year, has increasingly pressured Powell to lower borrowing costs more aggressively, telling reporters that Powell “raised rates too fast, too furious.”

Trump has also criticized the Fed’s decision to continue

reducing the huge volume of government-backed bonds it bought to help prop up the economy after the financial crisis a decade ago. Fed policymakers decided at their July meeting to bring an early end to the process, known as “quantitative tightening.”

That decision was also complicated, based on the minutes. While ending the process avoids the “appearance of inconsistency,” one in which rate cuts are loosening monetary conditions but policy on bond holdings is tightening them, some worried that such a move might create the “erroneous impression” that the Fed was trying to slow the economy, the minutes show.