Fed officials were sharply divided over September rate cut

12 Octobre, 2019, 13:38 | Auteur: Auguste Feret
  • Powell says Fed to resume growth portfolio but it's not QE

American central bankers have grown more fearful, saying a global slowdown and President Donald Trump's trade wars could drag down hiring and the broader economy with it, meeting minutes showed Wednesday. 9, the Federal Reserve releases minutes from its September meeting when it cut interest rates for a second time this year. Also, Federal Reserve staff noted that risk to the central bank's GDP growth forecast is tilted to the downside.

Federal Reserve officials were sharply divided last month when they made a decision to cut their key policy rate for a second time this year, a split that indicates the path forward for future rate cuts remains cloudy. They said that while they saw USA growth as generally solid, the forecast risks "were tilted to the downside". Traders in federal funds futures are betting that the Federal Open Market Committee will reduce rates again at its October 29-30 meeting from the current target range of 1.75% to 2%.

The CME Group, which tracks futures trading on the Fed's policy rate, is now putting the chance of a third cut in October at around 84%.

WASHINGTON-Federal Reserve officials anxious that slowing global growth and rising trade-policy uncertainty could exert a drag on hiring and the US economy when they cut interest rates last month.

Michael Pearce, senior USA economist at Capital Economics, said he found the minutes "noticeably ambivalent" about the timing of the next cut.

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Interest-rate projections released at the September meeting showed seven of 17 officials penciled in one more rate cut this year. St. Louis Fed President James Bullard argued for a larger cut, while Kansas City Fed President Esther George and Boston Fed President Eric Rosengren voted to keep rates unchanged. Three of the ten officials with voting rights were against the move.

But members of the central bank are grappling with a complex economic picture, the minutes showed, as ominous developments creep into what has otherwise been a sunny vista of steady expansion and job creation.

Powell told the gathering that the actions the Fed has already taken "are providing support for the outlook", which remains favorable but faces risks, principally from global developments such as trade and Brexit.

Nordea Markets analysts suggest that stress in the USA repo markets since mid-September tells the Fed that the balance sheet normalisation or Quantitative Tightening (QT) has gone too far, prompting Fed Chair Jerome Powell to announce that excess reserves will be returned to near the early September level and kept there as a new normal after which the Fed's balance sheet will grow organically. The Fed had been reducing its holdings that had surged to a peak of $4.5 trillion in the wake of the Great Recession as it engaged in several rounds of bond purchases aimed at lowering long-term rates and giving the economy a boost.

On the other hand, unemployment in August fell to its lowest level in 50 years, demand for housing is rising and the pace of hiring, while slower, remains more than strong enough to absorb new entrants into the labor market, economists say.

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