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Comment: July 30-31 FOMC meeting minutes break down the reasons for the rate cut, but clear the consensus was less uniform than usual

The FOMC breaks it down

Chair Jerome Powell’s post-meeting press briefing on July 31 has come under criticism that he failed to convey the FOMC consensus well and/or deliver a clear message about policymakers’ intention. The Chair speaks for the FOMC as a whole and the minutes suggest that formulating that into a coherent policy was a perhaps insurmountable challenge.

The July 31 decision to lower the fed funds target range by 25 basis points to 2.00%-2.25% was not a unanimous one as was seen in the vote of 8-2. However, it was also clear that the two dissents among voters were not the only objections among the 15 participants with “several” favoring keeping the rate at 2.25%-2.50%. Furthermore, it was not the only polarization in views since “a couple of participants indicated that they would have preferred a 50 basis point cut” rather than 25. This is an unusual situation and one that is probably not going to change before the September 17-18 meeting unless the economic data and/or developments give reasons for the consensus to gel around a certain position. The consensus is smaller and less uniform than is usually the case.

Three weeks ago the outlook for the economy was generally one that “participants judged” as remaining “strong, with the unemployment rate near historical lows”. While downside risks to the economy remained, these were deemed to have “diminished”. The discussion of inflation conditions was somewhat divided. “Some participants stressed that, even with the firming readings for consumer prices in recent months, both overall and core PCE price inflation rates continued to run below” the 2% objective and conditions of global economic weakened and trade tensions “had the potential to slow US economic activity” and consequently delay a return to the objective. However, “many other participants” were of the view that lower PCE inflation was “largely” transitory. It was noted that acyclical components in inflation components “appeared to be influenced by sectoral and technological changes” and was “not likely to respond much to monetary policy actions.”

The minutes broke down the justifications for the rate cut into three points:

  • As an appropriate response to “signs of deceleration in economic activity”, “particularly in business fixed investment and manufacturing” and “perhaps related” to trade and tariff policy.
  • As a “prudent step from a risk-management perspective”, i.e. a so-called insurance move responding to risks and uncertainties “surrounding the economic outlook”. “A number of participants observed that policy authorities in many foreign countries had only limited policy space to support aggregate demand should the downside risks to global economic growth be realized.”
  • And finally, to support the Fed’s 2% inflation objective where there was little or no pressure from upward movement in wages and where inflation expectations remained lower than was the historical norm.

Policymakers also wanted to be clear that the decision to end the reduction in the Fed’s balance sheet holdings was not a policy move. The minutes said, “Because the proposed change would end the reduction of its aggregate securities holdings only two months earlier than previously indicated, policymakers concluded that there were only small differences between the two options in their implications for the balance sheet and thus also in their economic effects.” The decision was taken, “Ending the reduction of securities holdings in August had the advantage of avoiding the appearance of inconsistency in continuing to allow the balance sheet to run off while simultaneously lowering the target range for the federal funds rate” and was expected to have little impact given the small change in time.

Policy review update

The minutes of the July 30-31 FOMC meeting presented the first review of the information received so far from the series of “Fed Listens” events designed to solicit information in a review of the framework of how the Fed conducts monetary policy. Policymakers have not yet reached any conclusions, but it is clear that discussion of short-term rates is going to be in its proximity to the Effective Lower Bound (ELB) – as opposed to the more common talk of the Zero Lower Bound (ZLB) – which may be a more flexible terminology should rates fall below zero. Also, policymakers remain uncertain about how to determine the neutral rate which may  In any case, it is clear that short-term rates and forward guidance, and balance sheet policy – a framework that “had service the Committee and the US economy well over the past decade” – are not on the chopping block in the future. Along with the “balanced approach” in serving the Fed’s dual mandate, it is unlikely these tools are going to change substantially since the Fed has “an improved understanding of how these tools operate” and “the Committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted”.

“Alternate strategies” for monetary policy remain for detailed discussion at future meetings. However, the minutes gave a sense that there is less liking for the complexities and communications challenges for a “make-up” approach in expressing the Fed’s inflation objectives. It sounds like a strategy setting “the inflation goal as a range centered on 2 percent and aim to achieve inflation outcomes in the upper end of the range in periods when resource utilization was high” is gaining in favor.

The FOMC is also considering alterations to it “Statement on Longer-Run Goals and Monetary Policy Strategy. In particular, it could expand its explanation of conduct of monetary policy near the ELB and “role of inflation expectations” as “the best means of conveying the Committee’s balanced approach and the symmetry of its inflation goal”. There was also discussion that “highlighted the importance of the Summary of Economic Projections (SEP) in conveying participants’ modal outlooks, with several participants suggesting that modifications to the SEP’s formant might enhance policy communications.”

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