• The minutes from the Federal Open Market Committee’s (FOMC) July meeting showed that despite a favorable outlook, “significant risks and uncertainties attending the outlook remained.” Specifically, the minutes pointed to weak business investment spending and manufacturing output arising from soft global growth and trade uncertainty. Meeting participants noted that policy easing would be a “prudent step from a risk-management perspective.”
  • Participants were also concerned about the inflation outlook. Overall inflation remained below the 2% inflation target, and wage pressures were moderate although unemployment continues to hover at historically low levels. For some participants, this potentially was a sign that the structural unemployment rate was significantly lower than current estimates.
  • The decision to reduce rates by 25bps was not unanimous. Some participants wanted to reduce rate by 50bps, citing stubbornly low inflation and also to the “low sensitivity of inflation to levels of resource utilization.” Several participants wanted to leave the target rate unchanged given the strength of the domestic economy. At the time of the meeting, some downside risks surrounding the federal debt ceiling and budget appropriations had diminished and the U.S. and China were set to resume trade negotiations.
  • Overall, participants agreed that monetary policy would be guided by the data and would avoid “any appearance of following a preset course.”

Key Implications

  • Lingering downside risks weighed on the minds of FOMC participants in the July meetings. Many were concerned about the impact of slowing global growth and trade uncertainty despite domestic growth continuing to hold up. Interestingly, participants opted to reduce rates at a time when downside risks appeared to be abating, suggesting that more monetary stimulus was indeed required to navigate the economy through turbulent waters.
  • With the domestic economy, particularly consumption, holding up in the face of deteriorating global conditions, we don’t believe the Fed is at the beginning of a typical easing cycle. Fed Chairman Jerome Powell characterized the last rate cut as a “mid-cycle adjustment” and therefore will move carefully with any further rate cuts keeping a close eye on the evolution of the data.
  • Nonetheless, the market-spooking events over the last few weeks are hard to ignore. The trade war with China turned up another notch, and global growth weakened further. All eyes will be on Chairman Powell as he takes to the podium on Friday morning at the Fed’s Jackson Hole Annual Meetings, speaking for the first time since the rate cut decision. We, like others, will be looking for clarity and guidance on the Fed’s next moves, especially as the downside risks stemming from the U.S.-China trade war and softening global growth appear to have risen.

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