Federal Reserve Weighs in on Negative Rates, Cash Infusions and a New Rate Cut
The Federal Reserve on Wednesday released minutes of the Oct. 29-30 policy meeting.
“Risks to the outlook associated with global economic growth and international trade were still seen as significant despite some encouraging geopolitical and trade-related developments,” it said. This shows officials are worried that weakness in manufacturing, trade and business investment could threaten the economic expansion by triggering cutbacks in hiring and consumer spending.
“Most participants judged that the stance of policy, after a [quarter-percentage-] point reduction at this meeting, would be well calibrated to support the outlook of moderate growth, a strong labor market” and stable inflation, the minutes said.
Fed officials voted at that meeting to cut their short-term benchmark to its current range between 1.5% and 1.75%. They modified their post-meeting statement to signal a diminished prospect of a fourth rate cut in December.
Investors expect the Fed to hold rates steady at its upcoming meeting on Dec. 10-11, and futures markets see a roughly 50% probability of one more rate cut by the middle of next year, according to CME Group.
Hopes for a trade truce last month has boosted investors’ optimism that the economy can avoid a downturn. But the Trump administration and Beijing have struggled to complete a partial deal this month after reaching what the White House billed as an “agreement in principle” on Oct. 11.
“In particular, some further signs of a global slowdown in economic growth emerged,” the minutes said, raising the risks of a sharper downturn in household spending that has lifted U.S. output this year.
The committee has been in debate since summer over how aggressively to reduce rates. Mr. Powell and other senior Fed officials have argued against waiting to see the economy slow sharply before lowering interest rates.
“The idea of keeping your powder dry, which is how it’s often expressed, ‘Don’t do things now. Save it for when you really need it.’ I think it’s actually a mistake,” said New York Fed President John Williams during a moderated discussion in Washington on Tuesday.
Fed officials viewed negative rates as unnecessary at last month’s meeting, the minutes said. They examined the tool as part of a broader review of their policy strategies should the economy weaken, leaving the Fed with rates pinned near zero, as occurred for seven years after the 2008 financial crisis.
“All participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States,” the minutes said. Officials saw the benefits of negative rates abroad as mixed, and they worried that introducing negative rates in U.S. capital markets would create “significant complexity or distortions to the financial system,” the minutes said. But the minutes said officials didn’t entirely rule out the possibility that the Fed might need to reassess the feasibility of the tool in the future.
In an unplanned 2nd meeting held via video conference on Oct. 4 officials discussed and subsequently agreed on a plan to rebuild bank deposits held at the Fed, known as reserves.
The minutes showed that there was unanimous support for their plan, announced on Oct. 11, to buy $60 billion a month in very short-term Treasury debt. Most officials supported the decision to announce their plan quickly, rather than to wait until the regularly scheduled meeting at month-end, the minutes said.
There is hope that these purchases will eventually replace daily and other short-term cash injections on the repo market which saw dangerous volatility in mid-September.
At the later meeting, Fed officials debated additional approaches to maintain stable conditions in very short-term funding markets.
One option would be to continue “relatively frequent” money-market operations that the Fed has employed in recent weeks. Officials also discussed implementing a new money-market facility that would make it easier for banks to exchange reserves for Treasury securities at all hours. They didn’t make any decisions last month.