Federal Reserve officials are sharply divided over whether more easing of monetary policy is necessary, but they generally see a "clearer picture of protracted weakness" in the business sector, according to minutes of the Fed’s September meeting.
The meeting resulted in the Federal Open Market Committee’s second 25-basis-point rate cut of the year, a move that most officials backed, as slower global growth and continued trade uncertainty weigh on the economic outlook.
Fed officials gave few clues in the September FOMC minutes on whether they were leaning toward easing policy again at their Oct. 29-30 meeting, though that is what markets currently expect. Fed officials agreed in September that “policy was not on a preset course,” the minutes said, mirroring a line Fed Chairman Jerome Powell used in an Oct. 8 speech.
But the minutes showed greater awareness among Fed officials of downside risks to the U.S. economy, which they generally agree remains on solid footing despite perceived weakness in business investment, manufacturing and exports.
That weakness "could give rise to slower hiring" and weigh on the consumer sector, which makes up about 70% of the U.S. economy, several Fed officials said. Although policymakers do not view that scenario as their baseline outlook, a couple of officials said that was because their individual forecasts assume lower rates "would help forestall that eventuality."
Several Fed officials said because changes in interest rates take time to work their way through the economy, it "was appropriate to provide the required policy accommodation now to support economic activity over coming quarters." Many Fed officials also viewed ongoing below-target inflation levels as another reason to cut rates by 25 basis points.
But several other Fed officials held more upbeat views on the economy, saying their forecasts had "changed very little" since the Fed cut rates in July, despite uncertainties hovering over the outlook.
"As they did not believe that these uncertainties would derail the expansion, they did not see further policy accommodation as needed at this time," the minutes said. "Changes in the stance of policy, they believed, should instead occur only when the macroeconomic data readily justified those moves."
Boston Fed President Eric Rosengren and Kansas City Fed President Esther George voted against the Fed's rate cut, preferring instead to keep rates flat. Other Fed officials have also voiced skepticism over the need for rate cuts, but they are not voters on the FOMC this year.
St. Louis Fed President James Bullard dissented on the FOMC's September decision as well, but he did so because he favored a more aggressive cut.
He was one of two Fed officials who voiced support for a 50-basis-point rate cut, arguing that such a move "would help reduce the risk of an economic downturn," the minutes showed.
Although Fed officials gave little guidance over whether they will cut rates again in October, futures markets have shifted toward that view since the September FOMC meeting.
The change in market pricing followed an Oct. 1 release from the Institute for Supply Management showing the U.S. manufacturing sector fell deeper into contraction territory in September. Two days later, the ISM's nonmanufacturing index also reported a sharper-than-expected September slowdown, though it remains in expansion territory.
Those data points could convince some Fed officials that more easing is necessary, but the minutes showed that a few policymakers think the central bank should consider pushing back against market expectations of further rate cuts. Those officials said market pricing currently suggests "greater provision" of easing than they support and that "it might become necessary" for the FOMC to adjust market views.
Several Fed officials also said the post-meeting FOMC statement should "provide more clarity about when the recalibration" of interest rates in response to trade uncertainty "would likely come to an end."
