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 quarter-point rate cut in July and the second quarter-point cut 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.
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 firstname.lastname@example.org
(END) Dow Jones Newswires
October 09, 2019 18:44 ET (22:44 GMT)
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