Fed will remain flexible, interest rates not on ‘preset course’

WASHINGTON: The US Federal Reserve will remain flexible and interest rates will not be on a “preset course” despite persistent risks from trade uncertainty and weak global growth, the central bank said Wednesday.
Although the minutes of the Fed’s policy meeting late last month showed officials were primarily focused on the risks to the US economy, amid fears about the blowback from President Donald Trump’s trade war with Beijing, they stressed that they would keep their options open on their next steps.
Minutes from the two-day meeting released on Wednesday showed policymakers’ ultimate decision to lower the central bank’s benchmark interest rate by a quarter percentage point drew more opposition than was reflected in the rate-setting panel’s 8-2 vote, announced after the meeting adjourned on July 31.
While a “couple” of participants favoured a deeper cut of half a percentage point to help lift inflation toward the Fed’s target and thwart fallout from global trade tensions, a larger number — characterised in the minutes as “several” — favoured no change at all.
The depth of the debate raises the stakes for the signal that Chairman Jerome Powell is set to deliver on Friday at the Fed’s annual policy retreat in Jackson Hole, Wyoming. It also shows a Federal Reserve not eager to give Trump the larger rate reductions he is demanding. “I think the thing that surprised me was how divided they were,” said Mary Ann Hurley, vice president for fixed income trading at D A Davidson in Seattle. “We’re really in uncharted territory. They are really concerned about doing or not doing the right thing.”
The divisions revealed in the minutes indicate there might have been more dissents if all participants had a vote. While Fed board governors are permanent voters, only five of the 12 regional reserve bank presidents have a vote at each meeting.
At the same time, the minutes also showed broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation.
Since that meeting, the Fed has come under increasing pressure to cut borrowing costs more, including a call by 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 favoured 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.
US stocks held on to session gains after the minutes were released, with the benchmark S&P 500 Index up about 0.77 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 rose after the minutes were published. The 10-year note yield climbed to 1.58 per cent, while the 30-year bond rose further above the key 2 per cent level, last trading at 2.06 per cent. It fell below 2 per cent for the first time ever last week as diminishing expectations for US economic growth fuelled demand for safe assets. — Reuters