WSJ - Fed Minutes to Show Committee Divide on Last Month’s Rate Cut

Wall Street Journal
Fed Minutes to Show Committee Divide on Last Month’s Rate Cut

The Federal Reserve releases the minutes of its July meeting Wednesday, shedding more light on its decision to cut interest rates for the first time in more than a decade.

The Federal Reserve releases the minutes of its July 30-31 meeting on Wednesday at 2 p.m. EDT, shedding more light on its decision to cut interest rates for the first time in more than a decade. Officials left the door open to lower rates again but Fed Chairman Jerome Powell disappointed investors at his post-meeting news conference when he didn’t endorse market expectations of an aggressive series of rate cuts to follow. Here’s what to watch:

Committee Cleavages
Nearly half of the Fed’s 12 reserve bank presidents said they didn’t see a convincing case to cut interest rates in the run-up to last month’s policy meeting. Two of them, Boston’s Eric Rosengren and Kansas City’s Esther George, had a vote and dissented from the decision to lower the policy rate by a quarter percentage point, to a range between 2% and 2.25%.

At the same time, there wasn’t much support for a larger, half-point rate cut at the meeting. Mr. Powell characterized the rate cut as a “mid-cycle adjustment” and said it wasn’t the start of a “long cutting cycle” of the type the Fed adopts in a recession or severe downturn.

The minutes will shed more light on how the rest of his Fed colleagues viewed that assessment and on what might compel them to consider reducing rates by more than another quarter or half percentage point this year than another quarter or half percentage point this year.

Downside Risks
Fed officials have a challenging task forecasting the economy during a period when escalating trade tensions are weighing on investors. Look no further than President Trump’s unexpected announcement on Aug. 1, just a day after the Fed’s meeting, that he would later this year impose 10% tariffs on $300 billion in Chinese goods that weren’t already subject to tariffs. How Fed officials judge the need for further stimulus in the face of trade policy uncertainty will be a key focus in the weeks leading up to their Sept. 17-18 meeting.

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Some officials supported cutting rates last month because of a desire to boost low inflation or because long-term bond yields had fallen below some short term bond yields.

The minutes could offer more detail on what served as the driving arguments for the July rate cut, which could help provide a better sense of which of these risks would shore up support for additional stimulus in
September and beyond.

The minutes will be dated, however, because the meeting preceded the escalation of trade tensions, which in turn sent long-term bond yields sharply lower.

Financial Stability
Mr. Rosengren and Ms. George favored holding rates steady last month and explained in their dissents they were concerned that easing policy at a time of relative economic stability could fuel asset bubbles or other financial instability.

Worries about corporate leverage have surfaced in many of the discussions on economic policy at meetings this year. One question is whether the decision to shift the monetary policy dials over the last seven months from one of tightening policy to easing it might lead officials to consider a re-calibration of regulatory policy.

The Balance Sheet
Fed officials also decided to end two months ahead of schedule the process of shrinking their $3.8 trillion portfolio of bonds and other assets. The portfolio, also known as the balance sheet, now is being held steady, with the Fed slowly reducing its holdings of mortgage bonds by letting them mature and using the proceeds to replace those redemptions with Treasury securities.

The Fed has yet to decide when it will allow the balance sheet to begin growing again. The minutes could reveal whether the matter was discussed at the meeting.

Operational Matters
In June, officials discussed a proposal to devise a new market facility to reduce volatility in the demand for reserves—the money banks keep on deposit at the Fed —but didn’t make much headway in determining their
next steps. Resuming this debate at the July meeting would offer a sign of somewhat greater urgency to pull together this facility amid concerns among some money-market investors about potential upward pressure on the Fed’s benchmark interest rate.

Write to Nick Timiraos at nick.timiraos@wsj.com