Fed officials sought rate flexibility amid conflicting economic signals

Minutes of the Fed’s July interest-rate setting policy meeting released Wednesday showed that central bankers are eager “to maintain optionality” when it comes to charting the course of future interest rate changes for the remainder of this year — and into 2020.

The minutes will reinforce the message that Federal Reserve Chairman Jerome Powell sent to investors three weeks ago, when he described the July rate cut as a “mid-cycle adjustment” and dismissed the idea that it was the start of a series of cuts.

The Fed typically does a string of cuts only when the economy is in a severe downturn or a recession.

President Donald Trump, who has repeatedly badgered the Fed over its rate policy, again on Wednesday told reporters that he believes the US should cut rates further to weaken the dollar and stay in line with other countries.

“We’ll see what happens with the Federal Reserve, whether or not they finally get smart and reduce interest rates like many other places around the world that we have to compete with,” Trump told reporters.

Throughout the year, Powell and other Fed officials have repeated the message that they would rely on fresh economic data to dictate decisions in order to keep the country’s longest economic expansion going.

A big reason the Fed wants to maintain flexibility is because it is faced with myriad uncertainties: slowing global growth and persistent trade uncertainty but reasonably strong domestic growth, low unemployment and muted inflation.

“A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook,” the minutes of the July 31-August 1 meeting read.

Officials who voted in favor of a rate cut felt that easing monetary policy would help “counter” some of those headwinds, and perhaps, also help to promote a faster return to the Fed’s inflation target of 2% — the level it considers healthy for the economy.

Despite some of the risks to the outlook, Fed officials agreed that most of the data since their last meeting in June had been “largely positive and that the economy had been largely resilient in the face of ongoing global developments.”

At no point did any Fed officials suggest there were signs of a recession while debating a rate cut. They did, however, note that economic growth for the second half of the year would be slower due to soft business investment and less government spending.

Since the last Fed meeting, though, markets have sent increasingly negative signals. Bond market yields briefly inverted last week, a classic recession warning, and countries like Germany and China delivered disappointing economic news.