“A couple” of Federal Open Market Committee members wanted a 50 basis point rate cut at its July 30-31 meeting, according to minutes released Wednesday, while “several” would have preferred no action.
Those backing the larger reduction sought “to better address the stubbornly low inflation rates of the past several years, recognizing that the apparent low sensitivity of inflation to levels of resource utilization meant that a notably stronger real economy might be required to speed the return of inflation to the Committee's inflation objective.”
Those wanting to hold rates considered the economy “to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment.” And while noting “lingering risks and uncertainties about the global economy in general, and about international trade in particular ... they viewed those risks as having diminished over the intermeeting period.”
The minutes said, “a few participants expressed concerns that further monetary accommodation presented a risk to financial stability in certain sectors of the economy or that a reduction in the target range for the federal funds rate at this meeting could be misinterpreted as a negative signal about the state of the economy.”
Those voting for the rate cut, the minutes say, “sought to better position the overall stance of policy to help counter the effects on the outlook of weak global growth and trade policy uncertainty, insure against any further downside risks from those sources, and promote a faster return of inflation to the Committee's symmetric 2 percent objective than would otherwise be the case.”
Also, the minutes spell out that this “should be viewed as part of an ongoing reassessment of the appropriate path of the federal funds rate that began in late 2018.”
FOMC members wanted to “maintain optionality in setting the future target range for the federal funds rate and” reiterate that future moves would be data dependent.
The Fed pointed to three reasons for the “insurance cut:” economic deceleration (although the outlook is still favorable); elevated risks and uncertainties; and inflation below 2%.
Members seeing a need for “flexibility” supports “the argument for the Fed to deliver another rate cut in September,” according to Edward Moya, senior market analyst, New York at OANDA. “With most officials viewing the July cut as a mid-cycle adjustment, it will take further deterioration with the global outlook for them to commit to an easing cycle.”
While inflation ticked up recently, “the overall longer-term trend has been downward and the risks of becoming Japan should keep the Fed committed to delivering further rate cuts,” he said, referring to Japan's extended period of deflationary pressures and negative interest rates.
When Fed Chair Jerome Powell speaks at Jackson Hole on Friday, expect him to “solidify a September rate cut and deliver weak commitment for more to come,” Moya said.
“The bullish case for stocks remains intact and we could see many focusing on the fact that a couple of FOMC participants supported half-point cut,” but “we should sideways price action until Powell’s Jackson Hole keynote speech on Friday. The Fed could very well correct their communication mistake at Jackson Hole, which would be welcomed by holders of risky assets. The markets are still pricing in four rate cuts over the next 12 months.”
Kashkari
In an op-ed in the Financial Times, Federal Reserve Bank of Minneapolis President Neel Kashkari said, “I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver.”
He says the idea that using forward guidance only when rates are near zero “is mistaken; forward guidance should be used now, before the federal funds rate returns to zero.”
“If a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength,” because the economy is keeping the rates low, the Fed is doing it out of necessity.
“At a minimum, we should commit to not raising rates again until core inflation returns to our 2 per cent target on a sustained basis.”
By using forward guidance now, Kashkari says, “if we take the risk of premature rate increases off the table, lower long-term rates should provide support to the economy,” and perhaps, avoid recession.
Daly
In a post on Quora.com, Federal Reserve Bank of San Francisco President Mary Daly wrote she backed the recent rate cut, which she called “an appropriate recalibration of policy in response to the headwinds we’re facing — along with inflation rates that continue to come in under our 2% target.”
A recession is not impending, she added, and she backed the move “based around my desire to see our economic expansion continue — not because I see an impending downturn on the horizon.”
Existing home sales
Existing home sales climbed 2.5% in July to a seasonally adjusted annual rate of 5.42 million after an upwardly revised 5.29 million pace in June, the National Association of Realtors reported Wednesday.
The June rate was originally reported as 5.27 million.
Economists polled by IFR Markets expected a 5.40 million pace in the month.
Three of the four regions posted sales gains, with only the Northeast declining.
Lower mortgage rates improved affordability, although supply remains an issue. In July, home for sale slipped to 1.89 million (a 4.2-month supply) from 1.92 million in June (a 4.4-month supply).
The median sale price was $280,800 in July, up 4.3% from $269,300 a year ago. This was the 89th consecutive month of year-over-year price gains.
