Minutes of the Federal Reserve policy meeting at the end of July, released yesterday after the usual three-week delay, confirmed that Fed Chair Jerome Powell was trying to walk a tightrope in combat boots as he attempted to smooth over differences in a sharply divided Federal Open Market Committee (FOMC).
As a rule, such minutes generally refer to “some,” “a few” or “several” participants holding a particular belief, but lately there has been more granularity than usual with “a couple” of participants getting their voices heard several times.
In fact, “a couple” of participants actually wanted a half-point cut in rates at the meeting instead of the quarter-point that was agreed upon.
They may have been nonvoting members or voting members who didn’t feel their disagreement rose to the level of a formal dissent. In any case, the actual dissent came from two members, Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed, who dissented because they didn’t want any cut at all.
According to the minutes, “several” participants wanted to hold steady, given low unemployment. No clues were provided as to who the others were beyond the two dissenters, though presumably they were nonvoting regional bank heads. “A few” were concerned that action to ease monetary policy would reflect negatively on the economy.
Just how far policymakers behind their closed doors might be overthinking this whole thing came in the rather odd report on the runoff of bond holdings acquired as part of quantitative easing. The decision to stop the runoff two months earlier than originally planned seemed consistent with an accommodative interest-rate policy, but apparently there was concern that it would give the “erroneous impression” that the balance sheet was an active tool of policy.
Duh. The minutes writer didn’t give any indication whether “many” or “several” were on either side of that discussion.
The core of the minutes, though, was that policymakers “generally” wanted to avoid “any appearance of following a preset course.” A quarter-point cut should be seen as a “recalibration” of policy, or, as Powell parroted in his press conference, “a mid-cycle adjustment.”
These were precisely the things that tormented investors, who really did want, and expect, a preset course of further rate cuts.
There may be a certain hypocrisy in the Fed minutes, because investors overwhelmingly—98.5% according to Fed funds futures contracts—expect a further, quarter-point cut in September and if the Powell Fed has shown anything, it's that it does not want to intentionally disturb investors.
The lip service to flexibility may have been simply a refusal to acknowledge the Twitter declamations of 'he who shall not be named,' and the reason Powell was wearing combat boots.
President Trump has realized that all he has to do is threaten tariffs to alarm market participants and force the Fed’s hand in lowering interest rates. Trump on Monday called for a full point cut in rates, though of course he will be happy with a quarter-point, which the Fed can hardly deny him.
It is, if it hasn't yet become clear, a curious situation, one that gets curiouser and curiouser by the moment.
Investors will be tuned in to Powell’s speech Friday at the Jackson Hole conference, hoping for further indications about the Fed’s plans. If he remains true to the FOMC’s desire to avoid the appearance of a preset course, he will be disappointingly anodyne.
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