Most of Federal Open Market Committee (FOMC) policymakers believed the 25 basis points (bps) cut was needed - Photo by the Central Bank Office

JAKARTA (TheInsiderStories) – Most of Federal Open Market Committee (FOMC) policymakers believed the 25 basis points (bps) cut was needed. At the September meeting, the Federal Reserves (Fed) cut its key rate by 25 bps for a second time in a row.

Three out of 10 voting members dissented, as two wanted to stay put while one member (Bullard) voted for a 50 bps cut. Furthermore, the dot-plot showed no clear path forward, with the median projection leaned towards keeping rates on hold for the rest of 2019.

“President (James) Bullard dissented because he believed that lowering the target range for the federal funds rate by 50 basis points at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks,” said the minutes meeting released yesterday (10/09).

In addition, according to him, a 50 basis point cut at this time would help promote a more rapid return of inflation and inflation expectations to target. While, Esther George dissented because she believed that an unchanged setting of policy was appropriate based on incoming data and the outlook for economic activity over the medium term.

Recognizing the risks to the outlook from the effects of trade policy and weaker global activity, she would be prepared to adjust policy should incoming data point to a materially weaker outlook for the economy. Then, Eric Rosengren dissented because he judged that monetary policy was already accommodative.

In his view, additional accommodation was not needed for an economy in which labor markets are already tight and could pose risks of further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.

Consistent with the Committee’s decision to lower the target range for the federal funds rate to 1-3/4 to 2 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.80 percent and voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 2.50 percent, effective September 19, 2019.

It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, October 29–30, 2019. The meeting adjourned at 10:40 a.m. on September 18, 2019.

FOMC voted 7-3 to cut rates by ¼ point. Although the final vote wasn’t unanimous, members agreed that the U.S. economy is approaching a turning point.

The Fed reported, during the week, the markets have begun pricing in another quarter point cut for the Oct. 30′ meeting. At this point, the Dow Jones Industrial Average is holding on to 200 plus gains and the US Dollar is losing ground versus the majors.

The Committee rated the global financial markets were volatile, with market participants reacting to incoming information about US – China trade tensions and the global growth outlook. In the weeks following the July FOMC meeting, US yields declined sharply and risk asset prices fell amid a spate of largely negative news about risks to the global economic outlook.

On net, treasury yields remained substantially lower, while the S&P 500 and corporate credit spreads reversed most or all of their earlier losses to end the period little changed. Money market mutual funds reportedly also held back some liquidity in order to cushion against potential outflows.

Rates on overnight treasury repurchase agreements rose to over 5 percent on Sept. 16 and above 8 percent on Sept. 17. Highly elevated repo rates passed through to rates in unsecured markets, said the Board.

The minutes said, the Fed has conducted overnight repurchase operations for up to US$75 billion. After the operation, rates in secured and unsecured markets declined sharply.

Rates in secured markets were trading around 2.5 percent after the operation. Market participants reportedly expected that additional temporary open market operations would be necessary both over subsequent days and around the end of the quarter.

For the Sept. 17 – 18 meeting, indicated that labor market conditions remained strong and that real gross domestic product (GDP) appeared to be increasing at a moderate rate in the third quarter. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures, was below 2 percent in July. Survey-based measures of longer-run inflation expectations were little changed.

Total non-farm payroll employment expanded at a solid pace in July and August, al­though at a slower rate than in the first half of the year. The unemployment rate remained at 3.7 percent through August, and both the labor force participation rate and the employment-to-population ratio moved up.

Total consumer prices, as measured by the PCE price index, increased 1.4 percent over the 12 months ending in July. This increase was slower than a year earlier, as core PCE price inflation (which excludes changes in consumer food and energy prices) moved down to 1.6 percent, consumer food price inflation remained below core inflation, and consumer energy prices declined.

The consumer price index rose 1.7 percent over the 12 months ending in August, while core inflation was 2.4 percent. Recent survey-based measures of longer-run inflation expectations were little changed on balance.

The nominal US international trade deficit remained about unchanged in June before narrowing in July. Exports, which had been soft over most of the past year, declined sharply in June but partially rebounded in July. This pattern was particularly notable in exports of non-aircraft capital goods and consumer goods.

Imports also declined sharply in June and then declined a little further in July. Imports of oil and consumer goods fell in June, while imports of capital goods dropped significantly in July. The BEA estimated that the change in net exports was a drag of about 3/4 percentage point on real GDP growth in the second quarter.

Furthermore, the Board reported, the projection for US economic activity was little changed in the near term, real GDP growth was still forecast to be slower in the second half of the year than in the first half, mostly attributable to continued soft business investment and a slower increase in government spending.

The projection for real GDP growth over the medium term was a bit weaker than the previous forecast, primarily reflecting the effects of a higher projected path for the foreign exchange value of the dollar and a lower trajectory for economic growth abroad, which were partially offset by a lower assumed path for interest rates.

Real GDP was forecast to expand at a rate a little above the staff’ estimate of potential output growth in 2019 and 2020 and then slow to a pace slightly below potential output growth in 2021 and 2022. The unemployment rate was projected to be roughly flat through 2022 and to remain below the staff’s estimate of its longer-run natural rate, which was revised down a little.

The policymakers forecast of total PCE price inflation for this year was revised down somewhat, reflecting slightly lower projected paths for consumer food and energy prices, along with a little lower forecast for core PCE prices. The core PCE price inflation forecast for this year was revised down to reflect recent data as well as downward-revised data for earlier in the year from the BEA’s annual revision.

Both total and core inflation were projected to move up slightly next year, as the low readings early this year were expected to be transitory. Nevertheless, both inflation measures were forecast to continue to run below 2 percent through 2022.

Commenting on the minutes, Citi expect a rate cut from the Fed this month then probably at least one more cut in December or later.

by Linda Silaen, Email: linda.silaen@theinsiderstories.com