FOMC minutes: Most Fed officials viewed cut as mid-cycle adjustment

Author: Adam Button | Category: Central Banks

Highlights of the July 30-31 minutes released Aug 21, 2019:

  • A number of Fed officials stressed need for Fed flexibility
  • A couple policymakers would have preferred a 50 bp cut to address low inflation
  • Several favored maintaining rates unchanged
  • Those who favored cut pointed to decelerating economy, elevated risks on global economy and inflation
  • A few policymakers expressed concern of 3m/10y yield curve inversion
  • A few participants expressed concerns that a cut could be misinterpreted as a negative signal about the state of the economy
  • Participants observed that current financial conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy
  • Several said uncertainties remained about efficacy of QE
  • Participants said forward guidance and QE might not be enough to eliminate protracted risks at lower bound
The market isn't going to like seeing mid-cycle adjustment again but I think the last bullet point is the most important one. It shows the Fed is seriously thinking about something new in its toolkit. That might be negative rates, buying equities or even helicopter money.

Here's the key passage:

Most participants viewed a proposed quarter-point policy easing at this meeting 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. A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook.
There is a clue there. It says the cut was 'part of' the adjustment, which means that more is to come. That probably meant 1-2 more cuts at the time but likely means 2-4 in light of the latest news.

 The minutes also detail the three reasons they saw for cutting 1) Deceleration in business fixed investment, manufacturing and overseas. 2) Risk management 3) Inflation.

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