The US Federal Reserve on Wednesday said that it would remain flexible and interest rates would not be on a “preset course,” despite persistent risks from trade uncertainty and weak global growth.
Although the minutes of the minutes of the Fed’s July 30 to July 31 policy meeting showed officials were primarily focused on the risks to the US economy, amid fears about the blowback from US President Donald Trump’s trade dispute with Beijing, they said that they would keep their options open on their next steps.
After the Fed cut the benchmark interest rate for the first time in more than a decade, the fact that officials highlighted the importance of maintaining “optionality” could unsettle financial markets that have been counting on another rate cut next month.
PRESIDENTIAL PRESSURE
After four rate increases last year — the last one in December — the Fed has been under relentless pressure from Trump to reverse course and slash rates to juice the economy.
While they made no mention of Trump’s constant attacks on Fed Chairman Jerome Powell, officials said that they would be “guided by incoming information and its implications for the economic outlook” and avoid “any appearance of following a preset course,” the minutes showed.
RECALIBRATION
The July rate cut was viewed as “part of a recalibration ... or mid-cycle adjustment” and, given the uncertainty surrounding the outlook, the officials “highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook.”
However, the minutes showed the central bankers are not unified, with several opposed to cutting rates while a couple favored a bigger cut.
Powell told a news conference on July 31 that the rate cut was meant as insurance “against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy.”
The minutes also said that officials were “mindful” that trade tensions were far from settled and that trade uncertainties could intensify again, while continued weakness in the global economy “remained a significant downside risk.”
With inflation stubbornly weak, a slowing US economy would further delay a sustained return of inflation to the two percent objective, the report said.
Despite the risks to the outlook, and that Fed officials expect US growth to slow in the second half of the year, they “continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric two percent objective as the most likely outcomes.”
A rate cut when the economy is showing solid, albeit slower, growth and unemployment is near historic lows, runs counter to conventional thinking.
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