Most Federal Reserve officials viewed the central bank's July 31 policy easing as a "mid-cycle adjustment" rather than the first of several interest rate cuts, according to minutes of the Fed's meeting.
The Fed lowered rates at its July meeting for the first time since the financial crisis, an action that many in the Federal Open Market Committee favored as weaker global growth continues to pose risks to the U.S. economy.
While many investors expect the Fed to opt for more rate cuts this year, officials declined to explicitly signal further policy easing during the meeting, according to the minutes, which are released three weeks after each FOMC decision.
Instead, the minutes showed Fed officials generally want their future policy moves to be dependent on incoming economic data, an approach they said would avoid "any appearance of following a preset course" of policy.
Most officials also saw their 25-basis-point cut as "part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months," the minutes showed. That was the message that Fed Chairman Jerome Powell seemed to deliver at his post-meeting news conference, during which he left the door open for further easing but declined to commit to any future changes. He is scheduled to speak again Aug. 23 at the Kansas City Fed's annual conference in Jackson Hole, Wyo.
A number of Fed officials said the central bank needs to "remain flexible and focused on the implications of incoming data for the outlook," noting that it is unclear when the downside risks to the economy may fade.
The minutes highlighted a split among Fed officials over whether their July 31 rate cut was necessary.
Those who backed the Fed's action generally thought the economic outlook remained favorable but flagged rising risks to that forecast. They cited a slowdown in corporate investment and manufacturing, along with slower growth overseas and continued trade tensions. They also noted that inflation has consistently run below the Fed's 2% target in recent months.
A couple of Fed officials wanted the central bank to cut rates by 50 basis points, instead of 25 basis points, partly because they said stronger action could "better address the stubbornly low inflation rates of the past several years."
But several Fed officials preferred keeping rates unchanged at the July meeting. That group likely included a handful of regional Fed presidents who signaled opposition to a rate cut ahead of the meeting but who do not currently vote on the FOMC. Two regional Fed presidents who are FOMC voters this year dissented on the Fed's action: Boston Fed President Eric Rosengren and Kansas City Fed President Esther George.
Policymakers who opposed a rate cut thought that the U.S. economy "continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment."
"These participants acknowledged that there were lingering risks and uncertainties about the global economy in general, and about international trade in particular, but they viewed those risks as having diminished" since the Fed's meeting in June, the minutes said.
Rosengren's interview with Bloomberg Television on Aug. 19 suggests his less-pessimistic view of the economy remains largely unchanged, though other Fed officials' views may have shifted in the past three weeks.
During that time, markets have experienced substantial volatility, and longer-term Treasury yields have plunged as investors have grown more pessimistic about the global growth outlook. In a notable development, the spread between 10-year Treasury notes and 2-year Treasury notes briefly dipped into negative territory. So-called yield curve inversions have historically preceded U.S. recessions.
The spread between 10-year Treasurys and 3-month bills has been inverted for several weeks this year, which a few Fed officials expressed concerns about at the July meeting.
"[That] could indicate that market participants anticipated weaker economic conditions in the future and that the Federal Reserve would soon need to lower the federal funds rate substantially in response," those participants said, according to the minutes.
Royce Mendes, senior economist at CIBC Economics, wrote in a note to clients that trade tensions between the U.S. and China have escalated since the July meeting, which "may be enough to turn" some of the officials who supported keeping rates steady.
"Given the deterioration in sentiment ... it does look like the Fed is still on course to cut rates next month again," Mendes wrote. "So long as the trade-war risks remain contained, that could be it from the Fed, but downside risks have been growing in recent weeks and could change that course."
