- Federal Reserve policymakers have become increasingly divided over how to weigh signs of strains on the economy against still solid growth.
- The policy-setting Federal Open Market Committee was already starkly split on the decision to lower its benchmark interest rate by a quarter percentage point at its last meeting in July.
- Developments since that meeting appear to have only increased division among FOMC members.
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A week after a key recession warning flashed for the first time in more than a decade, Federal Reserve policymakers have become increasingly divided over how to weigh signs of strains on the economy against still solid growth.
The policy-setting Federal Open Market Committee was already starkly split on the decision to lower its benchmark interest rate by a quarter percentage point at its last meeting in July. Some thought that a larger cut should have been made, minutes out Wednesday showed, while others were firmly against adjusting at all.
“The events since the July meeting will only drive those two factions further apart and present a real challenge for Chairman Powell as he tries to present a united front ahead of the September meeting,” said Curt Long, the chief economist at the National Association of Federally-Insured Credit Unions.
The yield curve inverted for the first time since before the global financial crisis in 2007 last week, which sent financial markets sharply lower as investors saw it as a signal of a potential recession ahead. Business investment and factory activity have weakened in recent months.
But other measures of growth have held up better than expected ahead of the September 18 FOMC announcement. Unemployment levels has held near historic lows for much of the year. Consumer spending, which accounts for more than two-thirds of economic activity, has outperformed expectations.
The minutes said inflation readings, which have come in below target for months, were a main driver behind the July cut. In a Financial Times op-ed on Wednesday, Minneapolis Fed President Neel Kashkari said the FOMC should commit to not raising interest rates until inflation hits 2%.
“Absent some surprise reversal in these economic developments, I will argue that we should not only cut the federal funds rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver,” he wrote.
Kashkari said if policymakers were to preemptively signal that rates would remain low, they might be able to avoid lowering interest rates to zero.
“If a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength,” Kashkari added. “It is like driving a car into a ditch and then declaring you are staying there by choice. The reality is you can’t get out. It is better to avoid it in the first place.”
But others have remained less convinced since the July meeting, where a few FOMC members expressed concern that further easing could pose risks to financial stability or be misinterpreted as a negative signal about the economy.
Two Fed policymakers dimmed hopes for a September cut on Thursday, saying they didn’t currently think further stimulus was necessary.
Philadelphia Fed President Patrick Harker told CNBC he thought the central bank should “stay here for a while and see how things play out.” In an interview with Bloomberg, Kansas City Fed President Esther George said there would need to be changes to the outlook for further adjustment.
“I’d be happy to leave rates here absent seeing either some weakness or some strengthening, some kind of upside risk that would cause me to think rates should be somewhere else,” Esther said.
A highly-anticipated speech from Powell at the Jackson Hole Symposium on Friday, which is set to begin at 10 a.m. ET, could shed more light on where the central bank is headed.