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Clarida: Fed going 'one meeting at a time,' divisions over next steps healthy

The Federal Reserve is taking its upcoming interest rate decisions "one meeting at a time," and the disagreements within the central bank about the outlook are healthy, Fed Vice Chairman Richard Clarida said Sept. 20.

The Fed lowered its benchmark federal funds rate by 25 basis points Sept. 18 for the second time in 2019, but Fed Chairman Jerome Powell has given little specific guidance on whether the central bank may ease policy again this year, and officials are split on their next move.

Pressed during a CNBC interview on whether more cuts are in store, Clarida said the Fed will go "one meeting at a time." The U.S. economy is in a "good place," and officials are monitoring "downside risks to a favorable outlook," such as slower global growth and ongoing trade tensions, he said.

"I'm going to say probably what you expect," Clarida said. "We're going to take this meeting by meeting. We're not on a preset course, and as we get into the October meeting and beyond, we'll take it on a case-by-case basis."

Three Fed officials dissented against the Sept. 18 rate decision, a level of disagreement not seen since 2016.

St. Louis Fed President James Bullard voted against the rate cut from a dovish perspective, saying that the Fed should have taken more aggressive action and cut rates by 50 basis points.

In a statement explaining his vote, Bullard said U.S. growth is expected to slow in the near term and the U.S. manufacturing sector "already appears in recession." Probability estimates of a recession have "risen from low to moderate levels," and the yield curve remains inverted, a development that has historically preceded recessions, he added.

A 50-basis-point cut "would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risk."

"It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize," he said. "At the same time, a 50-basis-point cut at this time would help promote a more rapid return of inflation and inflation expectations to target."

Boston Fed President Eric Rosengren and Kansas City Fed President Esther George also opposed the Fed decision, saying the central bank should have kept rates flat.

Rosengren said in a speech Sept. 20 that U.S. economic conditions are "quite favorable," with the 3.7% unemployment rate around historical lows and inflation showing signs of picking up toward the Fed's 2% goal. Although trade uncertainty is affecting the U.S. and global economies and denting business investment, GDP still grew by around 2% in the second quarter, and the risks "have not slowed the economy beyond" its longer-run potential, Rosengren said.

Plus, he added, low rates can encourage households and businesses to take on unsustainable debt levels and amplify a downturn if one were to happen, he said.

"While risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless," he said at a New York University Stern School of Business event. "In my view, there are clearly risks of headwinds hitting the economy, but the stance of monetary policy is already accommodative."

Asked about divisions at the Fed, Clarida told CNBC the central bank has a "long tradition of candid, frank discussion" that strengthens its deliberations.

"I think what it indicates is the economy is in a good place, but in the 11th year of an expansion, there are also some risks," Clarida said.

The differing outlooks were clear from the Fed's quarterly "dot plot" projections, which showed seven Fed officials leaned toward another rate cut this year, five preferred to keep rates flat after the Sept. 18 action and five others opposed lowering rates altogether.

But the core of the Federal Open Market Committee is still biased toward easing policy further, given that the risks they have flagged this year remain or even "look a little bit worse," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

"That, I think, clearly keeps the committee on a dovish trend," Luzzetti said.