Divided Fed set to cut interest rates this week

SAN FRANCISCO (Reuters) — Deep disagreements within the Federal Reserve over the economic outlook and how the U.S. central bank should respond will not stop policymakers from cutting interest rates at a twoday meeting that begins on Tuesday.

While an oil price spike after attacks on Saudi Arabian oil facilities over the weekend added to the list of risks facing an economy already slowed by ongoing trade tensions and global weakness, the deep divide evident around the Fed’s policymaking table means further rate cuts could be far from a done deal.

At one end of the Fed’s massive boardroom sit St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari, who are expected to argue for a steep reduction in borrowing costs to counter low inflation and an inverted Treasury yield curve.

Pushback from the opposite end is likely to come from Cleveland Fed President Loretta Mester, who opposed the Fed’s rate cut in July, and Philadelphia Fed President Patrick Harker, who only reluctantly supported it and says he wants to leave rates where they are “to see how things play out.”

Fed Chair Jerome Powell, seated midway down the table, faces the delicate task of taking on board those views and the disparate arguments of the other dozen policymakers to build consensus.

A top challenge: making sense of economic data that suggests the U.S. manufacturing industry may be contracting and inflation remains weak, even as households continue to spend and employers overall are adding plenty of jobs.

“The discord is extremely visible,” said Gregory Daco, chief U.S. economist at Oxford Economics. “If you look at the economy today, you look at an economy that’s bifurcated … The key question is whether that weakness seeps through the economy, and whether that’s aggravated.”

Since the Fed’s 8-2 decision to cut rates in July, a move that Powell called a ‘mid-cycle’ adjustment, the economic data has delivered mixed signals.

Strong retail sales and continued wage growth may add to Boston Fed President Eric Rosengren’s confidence that current economic conditions do not justify further policy easing. He dissented in the July policy decision.

The ongoing U.S.-China trade war makes Dallas Fed President Robert Kaplan among others concerned about slowing factory output and a slide in business investment. Kaplan supported July’s rate cut.

The newest wild card to factor in to the debate emerged unexpectedly in Saturday’s attacks on the Saudi oil facilities, which triggered the biggest spike in oil prices in more than two decades.