Fed policymakers at the September 17-18 meeting decided, in a 7-3 vote, to lower the benchmark overnight lending rate by a quarter percentage point to between 1.75 per cent and 2 per cent. — Reuters pic

WASHINGTON, Oct 10 — Most Federal Reserve policymakers supported the need for an interest rate cut in September, minutes of the central bank’s last policy meeting showed, but they remained divided on the path ahead for monetary policy.

The readout of the meeting, released yesterday, also showed that the Fed agreed it would soon need to discuss increasing the size of its balance sheet following ructions in short-term money markets. Fed Chair Jerome Powell announced an imminent expansion of the central bank’s assets on Tuesday.

Fed policymakers at the September 17-18 meeting decided, in a 7-3 vote, to lower the benchmark overnight lending rate by a quarter percentage point to between 1.75 per cent and 2 per cent.

“Most participants believed that a reduction of 25 basis points in the target range for the federal funds rate would be appropriate,” the Fed said in the minutes. The US central bank has lowered borrowing costs twice this year after having raised interest rates nine times since 2015.

But what remains unclear from the minutes is how a softening in economic data since that meeting will affect viewpoints on the need for further rate cuts, if at all.

In projections that accompanied the September statement, seven of the Fed’s 17 policymakers indicated they forecast one more rate cut this year. Five policymakers did not see any more cuts needed and the other five projected a rate rise by the end of 2019. Investors overwhelmingly expect another rate cut at the next meeting on October 29-30.

Since the meeting, economic data has increased fears that trade tensions are spilling over to the broader economy. US manufacturing activity tumbled to a more than 10-year low and service sector activity fell to a three-year low in September. Consumer spending, which has been driving US growth, has also begun to moderate.

The minutes “are consistent with already established division among the participants and a cloudy, if not stormy, economic outlook,” said Mark Hamrick, senior economic analyst at Bankrate.com, following the minutes.

Financial markets were little moved by the minutes, as investors focused on the ongoing trade saga. US stocks and the dollar rose on a report China was open to a partial deal with the United States. US Treasury prices were lower.

Different camps

Fed Chair Jerome Powell is in the camp that views rate cuts that have occurred as necessary insurance in order to keep the longest US economic expansion on record going and on Tuesday he flagged openness to more rate cuts to mitigate against such risks, repeating that the central bank will act “as appropriate.”

But others, such as Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, still do not see the need for rate cuts when the economy is growing moderately and unemployment is near a 50-year low.

The Fed has been near-continuously pilloried in recent months by President Donald Trump who called them “boneheads” ahead of the September meeting for not cutting interest rates more. Earlier yesterday, Trump criticised the central bank again. “The USA is doing great despite the Fed!” he tweeted.

The minutes showed Fed policymakers generally had become more concerned with trade risks and other headwinds to the economy, such as slowing global growth and the uncertainty over Brexit.

But that was where the consensus mostly ended. Several policymakers felt it would be prudent for the Fed to cut rates now to guard against risks while several others said the current US economic outlook did not justify a rate cut.

“They contended that the key uncertainties were unlikely to be resolved soon. Furthermore, as they did not believe that these uncertainties would derail the expansion, they did not see further policy accommodation as needed at this time.”

Several policymakers noted that statistical models suggested the likelihood of a recession over the medium term had increased in recent months and a number warned that the labor market coming into 2019 may have been less strong than previously thought, pointing to Bureau of Labor Statistics preliminary revisions to payrolls data.

Policymakers also discussed a solution to recent volatility in US short-term funding markets, the minutes showed.

At the September meeting policymakers agreed the liquidity crunch meant they would have to soon discuss expanding the Fed’s balance sheet but emphasised it “should be clearly distinguished from past large-scale asset purchase programs,” something Powell also made clear in his comments on Tuesday.

Several policymakers also suggested further discussion on establishing a standing repo facility, which would allow firms to borrow cash as needed at a fixed rate. — Reuters