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Fed Minutes Show Rates on Hold as Fed’s Still Divided on the Next Path

The Federal Reserve Bank is unsure on which path to take about interest rates. Minutes of its last month’s meeting signaled the bank had decided to pause its easing cycle after the rate cut in October.

The information released on Wednesday of the October policy discussion showed the Fed voted 8-2 to lower rates by a quarter percentage point. It also showed policymakers further discussed the possibility of setting up a standing repo facility. All this in the wake of recent stresses in the short-term money markets.

“Most participants judged that the stance of policy, after a 25 basis point reduction at this meeting, would be well-calibrated to support the outlook of moderate growth, a strong labor market, and inflation near the committee’s symmetric 2% objective,” the Fed said in the minutes

After the meeting, the Fed Chair-Jerome Powell indicated the Fed will have to hold off with rates. He said it would only change if there were a “material” change in the U.S economic outlook.

The statement meant that October’s reduction in borrowing costs would be the last rate cut in the short term.

“The committee intends to keep rates on hold for the time being. After three consecutive rate reductions, the mid-cycle adjustment is over,” Bob Miller said.

Bob Miller, the Head of America’s Fundamental Fixed Income at BlackRock Inc.

“Beyond that…new information contained in these minutes was limited.” He added.

The Economic Influences

The Fed has positioned rate cuts as insurance to help shield the US economy from the effects of US-China trade war and the slowing global growth. Manufacturing, exports, and business investment are hurting because of these.

The US financial markets remained stable after the release of the minutes as investors focused on the elusive US-China trade deal.

In the minutes, there was little information about that a “material” reassessment would involve. Two policymakers wanted the Fed to make it clear that another rate cut would not happen soon, unless there were a significant economic slowdown.

Robert Kaplan, Dallas Fed President, has since said the price of his support was such a statement being made.

On Tuesday, John Williams the New York Fed President, said he would consider a material change to be of the US economy slowed to below-trend growth continuously. Or if inflation persistently faltered.

The Federal Reserve Bank is forecasting the economy growing 2.2% this year. Slightly above its potential, which the bank estimates around 2%.

Fed committee increasingly divided

Economic growth has slowed down this year. Uncertainties that sectoral weakness could spread to the broader economy have not materialized. It continues to expand to a moderate pace with unemployment near a 50-year low and consumer spending. Consumer spending accounts for roughly 70% of the US economic activity, still holding up.

The discord has left the committee increasingly divided.

Eric Rosengren, Boston’s Fed, and Esther George, Kansas City Fed’s voted against the October rate cut. Since the meeting, several non-voting policymakers said they stood against the October conclusion.

“Many participants judged that an additional modest easing at this meeting was appropriate in light of persistent weakness in global growth and elevated uncertainty regarding trade developments,” the minutes said.

Some policymakers opposed the rate cut, observing the economic outlook as still promising. Inflation moved back to the Fed’s goal and in “in light of lags in the transmission of monetary policy, preferred to take some time to assess the economic effects of…previous policy actions.”

The standing repo facility would allow companies to borrow cash as needed at a fixed rate. Policymakers said it was a useful backstop to support the Fed funds rate in the event of shock. However, they also noted that there might be little need for one once ample reserves have been established.

Policymakers did not make a final decision at the meeting.

The Federal Reserves started buying Treasury bills in mid-October to increase the level of reserves in the banking system. The Fed was responding to a liquidity crunch in mid-September that caused borrowing rates in short-term lending market spike.

The Fed has one more interest- rate-setting meeting before the year, on Dec 10-11. But investors now see the Fed keeping the rates unchanged until mid-2020.



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