Fed Officials Last Month Worried Trade War Could Dim Hiring, Consumer Spending
October 09 2019 - 1:30PM
Dow Jones News
By Nick Timiraos
WASHINGTON-Federal Reserve officials worried that slowing global
growth and rising trade-policy uncertainty could exert a drag on
hiring and the U.S. economy when they cut interest rates last
month.
Between officials' meeting in late July and in mid-September, "a
clearer picture of protracted weakness in investment spending,
manufacturing production and exports had emerged," said minutes of
the Sept. 17-18 policy meeting, which were released on
Wednesday.
Officials expressed worry that weakness in business investment,
trade and manufacturing could eventually erode consumer spending,
which has been the main engine of growth for the U.S. economy in
recent years. Some officials also pointed to models that in recent
months indicated a rising likelihood of recession over the medium
term.
"One risk that the economy faced was that the softness recorded
of late in firms' capital formation, manufacturing and exporting
activities might spread to their hiring decisions, with adverse
implications for household income and spending," the minutes
said.
Fed officials voted at that meeting to cut interest rates by a
quarter percentage point to their current range between 1.75% and
2%.
Risks from global developments have made Fed officials reluctant
to say more about upcoming policy moves. The minutes of last
month's meeting didn't provide a firm sign, but a spate of weak
factory data and other signs of a slowdown since then have fueled
market expectations of another cut in October.
Senior Fed officials have not expressly pushed back against
those expectations in recent public comments.
The committee has been divided in recent months over how
aggressively to forestall potential economic weakness by cutting
rates. Three officials dissented from last month's decision, with
two preferring no action and one preferring a larger, half-point
cut.
Interest-rate projections released at the September meeting
showed seven of 17 officials penciled in one more rate cut this
year. Five thought the rate cut was a mistake, and five thought it
was appropriate but penciled in no further cuts.
On Tuesday, Fed Chairman Jerome Powell again compared the
current sequence of rate cuts to two episodes in 1995 and 1998 when
the Fed cut interest rates three times in a few months.
"The Fed cut, and then cut again, and then cut a third time," he
said. "The economy took that accommodation onboard and gathered
steam again, and the expansion continued. So that's the spirit in
which we're doing this."
Some Fed officials may read softer economic data as confirmation
of the slowdown they anticipated when they cut rates twice this
summer, but others may see it as a more concerning development that
warrants another cut this month.
Mr. Powell acknowledged risks to the U.S. economy from global
developments during his remarks Tuesday but played down any worries
about a recession on the horizon.
"Clearly, things are slowing a bit now…but [growth] may just be
gathering itself," he said. "There's no reason why the expansion
can't continue."
While officials' baseline outlook for the economy remained
favorable at last month's meeting, most of them premised that
outlook on the Fed cutting rates as anticipated by financial
markets, the minutes said.
Officials said they didn't see much evidence of industrial
activity picking up at last month's meeting, with trade policy
uncertainty "contributing importantly to these declines," the
minutes said.
Meantime, steady job growth was set against the backdrop of
recent revisions to hiring in 2018 that showed a slower expansion
that previously reported. The development prompted a few officials
to urge vigilance in monitoring "any sign of softening in labor
market conditions."
Moreover, several officials said that because monetary policy
worked with a lag, "it was appropriate to provide the requisite
policy accommodation now to support economic activity over coming
quarters," the minutes said.
Some officials opposed last month's rate cut because they didn't
think recent risks would derail the expansion, and they wanted to
see stronger evidence that uncertainty was leading to weaker growth
before cutting rates.
A few unidentified officials at last month's meeting also
expressed concern that market expectations of up to a percentage
point in rate cuts over the coming year were out of step with the
rate-setting committee's current outlook.
These officials thought "it might become necessary for the
committee to seek a better alignment of market expectations
regarding the policy rate path with policymakers' own expectations
for that path," the minutes said.
As a result, some of these officials wanted the Fed to provide
more specificity about when it might be done cutting interest rates
in response to rising trade policy uncertainty, the minutes
said.
(END) Dow Jones Newswires
October 09, 2019 14:15 ET (18:15 GMT)
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