Fed debated bigger rate cut, wanted to avoid appearing on path for more cuts

A July 2019 photo shows US Federal Reserve chairman Jerome Powell speaking during a news conference.
A July 2019 photo shows US Federal Reserve chairman Jerome Powell speaking during a news conference.PHOTO: AP

WASHINGTON (REUTERS) - The Federal Reserve debated cutting interest rates more aggressively at its last meeting, although central bankers were united in wanting to avoid the appearance of being on a path to more rate cuts, records from the meeting showed.

The US central bank cut rates by 25 basis points at the close of its July 30-31 meeting, with minutes of the meeting published on Wednesday (Aug 21) showing broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation.

"A couple of participants indicated that they would have preferred a 50 basis point cut," according to the minutes, which added that policymakers favoring such a move were concerned by inflation being too low.

Since that meeting, the Fed has come under increasing pressure to cut borrowing costs more, including a call by US President Donald Trump on Wednesday for the Fed to slash its benchmark rate.

However, Fed policymakers agreed at their July 30-31 meeting that they did not want to give the impression they were planning more rate cuts.

"Participants generally favored an approach in which policy would be guided by incoming information... and that avoided any appearance of following a preset course," according to the minutes.

KEEPING FLEXIBLE

US stocks held on to session gains after the minutes were released, with the benchmark S&P 500 Index up about 0.75 per cent on the day.

"The Fed clearly wants to be flexible. They are clearly worried about some of the global tensions that are out there, whether it is trade or Brexit or some of those international developments," said Willie Delwiche, investment strategist at Baird in Milwaukee.

Yields on longer-dated US Treasury securities dropped to the lows of the day. The 10-year note yield slipped to 1.55 per cent, while the 30-year bond dropped back to near the key 2 per cent level, last trading at 2.02 per cent. It fell below 2 per cent for the first time ever last week as diminishing expectations for US economic growth fueled demand for safe assets.

The dollar weakened fractionally against a basket of major trading partners' currencies.

The comments on Wednesday by Trump, who has repeatedly criticised the Federal Reserve's policies, come as he seeks to downplay worries that a trade war between the United States and China could weigh on the US economy and trigger a possible recession before the November 2020 presidential election.

Minneapolis Federal Reserve Bank President Neel Kashkari, who does not have a vote on the Fed's monetary policy committee this year but participates in policy discussions, urged the Fed on Wednesday to use pledges about future policy, known in central banking as "forward guidance," to boost the economy.

The July 30-31 policy meeting also included discussion of the Fed's research into potential changes to its approach to setting policy. A number of policymakers said the Fed could have been more aggressive in using bond purchases to fight the 2007-09 recession.

However, policymakers also said tools like bond purchases and forward guidance might not be enough to eliminate the risk of policy being hampered in the future when the Fed's benchmark rate gets close to zero.