Federal Reserve officials viewed the July interest rate cut as a “recalibration” of monetary policy and not as the start of a long string of reductions, according to minutes from the July meeting released on Wednesday.
Members were divided on how to move to combat apparent soft spots in the economy, with a “couple” of members wanting to cut interest rates by half a percentage point in July, instead of a quarter of a percentage point, to combat low inflation, according to the minutes.
“Several participants” were in favor of keeping rates the same, citing a strong labor market, confident consumers and an unemployment rate near historic lows. And two officials voted against the rate cut, pointing to a strong labor market and robust consumer spending.
Officials overall voted to cut rates, citing concerns over lower-than-expected inflation, “sluggish” business investment and uncertainties over trade policy. However, they characterized the rate drop as a “mid-cycle adjustment” and noted the importance of being “flexible” because some of the risks they were monitoring could be resolved.
The three weeks since the meeting have been marked by increased trade tensions, volatile stock markets, and a back-and-forth from the president about whether more tax cuts are needed to avoid an economic slowdown.
A few days after the July meeting, President Trump announced a new round of tariffs against products imported from China, and then delayed a portion of the levies until mid-December to minimize the impact on consumers during the holiday shopping season. The bond markets flashed a recession warning last week when the yield on 10-year Treasury bonds briefly fell below the yield on two-year Treasurys. Investors widely expect the Fed to lower the benchmark rate again in September, but the size and frequency of any potential rate cuts is up for debate.
Two members of the committee, Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, voted against the rate decrease because they wanted to see more evidence of a slowdown. One member was concerned that cutting rates now, when the economy is strong, could “have adverse implications for financial stability.”
Trump intensified his attacks on the Federal Reserve on Wednesday, accusing the central bank of hindering economic growth at a time when the White House is increasingly concerned about a potential downturn.
In tweets, Trump blamed Federal Reserve Board Chair Jerome H. Powell for the slowdown in economic growth, saying his administration is “doing great” with China and other trade deals.
He renewed his calls on Fed officials to slash interest rates to boost the economy. “The only problem we have is Jay Powell and the Fed,” Trump wrote on Twitter.
Many economists say the country is not in a recession but agree the economy is growing more slowly as business investments decline, the manufacturing industry struggles and stock markets react to uncertainty over trade policy.
Trump compared the U.S. economy to Germany and other countries in Europe where interest rates are near zero or in negative territory. “We are competing with many countries that have a far lower interest rate, and we should be lower than them,” he wrote.
Trump said this week that the White House was considering a temporary payroll tax cut and other tax changes amid worries about a potential downturn, which could hurt his chances during the 2020 presidential election. The discussions indicated Trump was considering steps that would typically be reserved for moments when the economy is in a deep downturn. On Wednesday, he reversed himself, saying he was no longer considering the tax cut.
Federal Reserve officials are examining their options for extending the recovery at a time when interest rates are historically low, limiting the bandwidth of their conventional methods for boosting the economy. The Fed cut the benchmark interest rate to just below 2.25 percent from about 2.5 percent in July. (Typically, the Fed will try to boost the economy by lowering rates to encourage businesses and consumers to borrow and spend.)
Trump frequently criticizes the Fed for raising rates last year. On Monday, he called on the central bank to lower rates “by at least 100 basis points,” which would bring the benchmark rate down to 1.25 percent. Trump also asked the Fed to introduce more “quantitative easing,” a measure Fed officials take to pump more money into the economy and lower rates by purchasing more bonds.
Powell and other Fed officials are considering further rate drops but say their decision will be driven by economic data. Officials have to balance their directive to prop up the labor market and control inflation while protecting the independence of the agency. Four former Fed chairs, including Paul Volcker, Alan Greenspan, Ben Bernanke and Janet L. Yellen, joined forces in an op-ed stressing the importance of a central bank that is able to act independently and “free of short-term political pressures.”
Later this week, all eyes will be on Powell, who is scheduled to speak at 10 a.m. Friday during the annual economic policy symposium in Jackson Hole, Wyo. Investors will listen closely for clues as to what steps the Fed might take next.