Fed Officials Last Month Worried Trade War Could Curb Hiring, U.S. Economy--Update
October 09 2019 - 06:33PM
Dow Jones News
By Nick Timiraos
WASHINGTON -- Federal Reserve officials grew more worried when
they cut interest rates last month that slowing global growth,
exacerbated by the U.S.-China trade war, could sap domestic hiring
and economic activity.
Since last month's Fed meeting, surveys and other economic data
have hinted that weakness in the hard-hit manufacturing might be
spreading into other parts of the U.S. economy, such as the
services sector. Officials in recent days haven't dispelled market
expectations that they would cut interest rates when they meet
later this month, for their third reduction this year.
"A clearer picture of protracted weakness in investment
spending, manufacturing production and exports had emerged" between
the Fed's first rate cut in July and the second one at its Sept.
17-18 policy meeting, according to minutes of the latter meeting
released Wednesday.
The minutes also indicated Fed Chairman Jerome Powell could face
pressure from the rate-setting committee to more strongly signal
when the central bank might be done cutting interest rates.
Officials voted at the meeting to lower their benchmark rate to a
range between 1.75% and 2%.
Officials last month flagged the potential for reductions in
business investment to chill hiring, which would weaken consumer
spending -- the primary engine of U.S. economic growth. Some also
pointed to models that in recent months indicated a rising
likelihood of recession over the medium term.
Some Fed officials may read softer economic data since last
month's meeting as confirmation of the slowdown they anticipated
when they cut rates twice this summer. But others may see it as a
more concerning development that warrants another reduction this
month.
Fed officials cited muted inflation pressures, trade-policy
uncertainty and weak global growth to justify lowering interest
rates in July and September.
"All three of those things remain, and in addition to that,
we've received evidence the domestic economy is slowing faster than
they had expected at the September meeting," said Matthew Luzzetti,
chief U.S. economist at Deutsche Bank.
Mr. Luzzetti said he expects a continued slowdown in U.S.
economic activity and hiring to prompt rate cuts at the Fed's next
three meetings -- in October, December and January.
The minutes from the September meeting indicated the bigger
debate this month could center on whether and how officials signal
their future plans, including when they might finish cutting
rates.
A few unidentified officials expressed concern that market
expectations of more than three quarter-point rate cuts by the end
of 2020, including last month's cut, were out of step with the
rate-setting committee's current outlook.
These officials thought "it might become necessary for the
committee to seek a better alignment of market expectations
regarding the policy rate path with policymakers' own
expectations," the minutes said.
The minutes also said a group of officials wanted to provide
more specificity about when the central bank might be done cutting
interest rates in response to rising trade-policy uncertainty, the
minutes said.
While an October rate cut now looks like a "done deal," said
Priya Misra, head of interest-rate strategy at TD Securities,
"markets may be disappointed by the Fed not giving any more sign of
any cuts."
"They are already talking about 'When should we end easing,'"
Ms. Misra said after the minutes.
The Fed has been divided in recent months over how aggressively
to forestall potential economic weakness by cutting rates, with a
minority of officials arguing that rate reductions aren't
needed.
Interest-rate projections released at the September meeting
showed seven of 17 officials penciled in one more rate cut this
year. Five thought the rate cut approved then was a mistake, and
five thought it was appropriate but penciled in no further
cuts.
Fed officials have continued to refer to the current sequence of
rate cuts as an adjustment, rather than the start of an open-ended
string of easing measures to combat an imminent downturn.
During a question-and-answer session at an economics conference
on Tuesday, Mr. Powell again compared the current sequence of rate
cuts to episodes in 1995 and 1998, when the Fed cut interest rates
three times in a few months.
"The Fed cut, and then cut again, and then cut a third time," he
said. "The economy took that accommodation onboard and gathered
steam again, and the expansion continued. So that's the spirit in
which we're doing this."
Mr. Powell acknowledged risks to the U.S. economy from global
developments during his remarks Tuesday, but played down any
worries about a recession on the horizon.
"Clearly, things are slowing a bit now...but [growth] may just
be gathering itself," he said. "There's no reason why the expansion
can't continue."
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
October 09, 2019 18:18 ET (22:18 GMT)
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