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Minutes released on Wednesday showed a fractious meeting on many
fronts last month when a divided Fed cut interest rates for the
first time in a decade. But the consensus to not reveal their
intentions was clear, and may show that the steady browbeating
by President Donald Trump has begun to influence how the Fed
communicates.
Undercommit, and it may throw markets off course - and draw more
fire from Trump, who has been relentless in demanding not one
but a slew of rate cuts and even a return to crisis-era bond
buying to supercharge a softening but still-growing economy.
Overcommit, and it looks like capitulation to the White House, a
possible blow to the Fed's perceived status as an independent,
technical agency that does not consider politics in its policy
decisions.
Yet Trump has been adamant, particularly as market data has
indicated some doubt about the future of the record-setting U.S.
expansion, that the Fed should act to bolster an economy that
seems on many fronts to be doing fine.
Safer in that situation to "be guided by incoming information
and its implications for the economic outlook" and avoid "any
appearance of following a preset course" of further rate cuts -
in other words to stay mum.
There were serious policy disagreements at the last meeting when
the Fed voted to cut the target policy rate 25 basis points,
minutes of the meeting released Wednesday show.
Some wanted no cut at all, and two voting members dissented.
Some wanted a half-point cut, and in the last set of
policymakers' economic projections, a near majority said rates
should fall again by year's end.
But since then, in public, even those who wanted deeper cuts
have dialed back their language a notch.
In a Financial Times column on Wednesday, Minneapolis Fed
President Neel Kashkari framed his call for the Fed to use more
"forward guidance" in terms of a promise not to raise rates -
not a promise to cut them.
In his first comments after the July meeting, St. Louis Federal
Reserve president James Bullard said the Fed would not move
again in response to changes in trade policy: It had bought its
"insurance" against the administration's trade war by cutting
rates once and would now look at how the economic data responds.
But a return to "data dependence" at this point poses a dilemma
for Fed chairman Jerome Powell, due to speak here Friday in what
will be a closely watched appearance at the central bank's
annual policy retreat in the Wyoming mountains.
With bond markets again sending a warning signal about the
near-term economic future as short-term rates move above
long-term ones, Powell may actually need to say more - about
what the Fed plans, or at least what is influencing its
thinking.
"(W)hat Powell has to say on Friday is going to be much, much
more important than these minutes," said Mary Ann Hurley, vice
president in fixed-income trading at D.A. Davidson in Seattle.
Is it inflation that is too weak, or job gains that may be too
strong to sustain? If overseas data matters, would a German
recession trigger lower U.S. rates?
"His main message is going to be some combination of trying to
arrest the panic in fixed income markets without being seen as
pandering to trump," said Adam Posen, president of the Peterson
Institute for International Economics.
When they cut rates in July, contrary to the usual sense of a
strong consensus narrative about the reason why, different
policymakers seemed motivated by a hodgepodge of reasons.
Demands from the White House were not among them. Fed officials
insist they are not hostages to Trump. But he may be holding
their tongue.
(Reporting by Howard Schneider; Editing by Dan Burns and Lisa
Shumaker)
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