Fed will remain flexible, rates not on 'preset course': Minutes

Exterior view of the US Federal Reserve building in Washington, DC. (Photo: AFP/KAREN BLEIER)

Although the minutes of the Fed's policy meeting late last month showed officials were primarily focused on the risks to the US economy, amid fears about the blowback from President Donald Trump's trade war with Beijing, they stressed that they would keep their options open on their next steps.

After the Fed cut the benchmark interest rate for the first time in more than a decade, the fact that officials highlighted the importance of maintaining "optionality" may unsettle financial markets that have been counting on another rate cut in September.

After four rate increases last year - the last one in December - the Fed has been under relentless pressure from Trump to reverse course and slash rates to juice the economy.

While they made no mention of Trump's constant attacks on Fed Chairman Jerome Powell, officials said they would be "guided by incoming information and its implications for the economic outlook" and avoid "any appearance of following a preset course," according to the minutes of the Fed's Jul 30-31 policy meeting.

The July rate cut was viewed as "part of a recalibration ... or mid-cycle adjustment" and, given the uncertainty surrounding the outlook, the officials "highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook."

However, the minutes showed the central bankers are not unified, with several opposed to cutting rates while a couple favored a bigger cut.

"The July minutes underscore why Fed Chairman Jay Powell had such a hard time explaining the Fed's decision to cut rates; the vote cleared by an even smaller majority than depicted in the statement; they had two extremes fighting against each other," economist Diane Swonk of Grant Thornton said in an analysis.

UNCERTAINTY PERSISTS

Continuing trade frictions have increased uncertainty and caused businesses to hold off on investments, at a time when China's economy is slowing and Europe is facing the uncertainty of Brexit, and those risks are expected to persist, the Fed said.

The "continued weakness in global economic growth and ongoing trade tensions had the potential to slow US economic activity," the Fed cautioned.

Powell acknowledged at his news conference on Jul 31 that the rate cut was meant as insurance "against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy."

And the minutes said officials were "mindful" that trade tensions were far from settled and that trade uncertainties could intensify again, while continued weakness in the global economy "remained a significant downside risk."

And with inflation stubbornly weak, a slowing US economy would further delay a sustained return of inflation to the two per cent objective, the report said.

Despite the risks to the outlook, and the fact that Fed officials expect US growth to slow in the second half of the year, they "continued to view a sustained expansion of economic activity, strong labour market conditions, and inflation near the committee's symmetric two percent objective as the most likely outcomes."

In fact a rate cut when the economy is showing solid, albeit slower, growth and unemployment is near historic lows, runs counter to conventional thinking.