Federal Reserve officials were leaning towards an interest rate cut “in the near term” to address the risks to the economic outlook when they last met in June to set monetary policy, according to minutes released by the US central bank.
Although the Fed decided to hold off a rate cut last month, with only “a couple” of officials pushing for immediate action, a broad consensus was developing at the US central bank around the idea of monetary easing within a short timeframe to offset growing risks to the outlook.
“Many participants indicated that the case for somewhat more accommodative policy had strengthened,” the minutes released on Wednesday afternoon said. “Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook”, they added.
The notes taken during the meeting revealed a key rationale for a possible rate cut by the Fed would be as an “insurance” policy of sorts against trade tensions and a darker outlook for the global economy, even though US unemployment remains at historic lows and US growth has been relatively solid.
“Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy, and hence, was appropriate policy from a risk management perspective,” the minutes said.
One of the most downbeat segments of last month’s Fed meeting appears to have been a lengthy discussion about “softness” in business fixed investments, which is emerging as a core worry for Fed policymakers.
“Several participants noted comments from business contacts reporting that their base case now assumed that uncertainties about the global outlook would remain prominent over the medium term and would continue to act as a drag on investment,” the minutes said.
“Several participants also noted reports from business contacts in the manufacturing sector suggesting they were putting capital expenditure or hiring plans on hold and were re-evaluating their global supply chains in light of trade uncertainties,” they added.
Although the discussion of the state of the labour market and consumer spending was more upbeat, Fed officials appeared concerned that inflation continued to run below the Fed’s 2 per cent target, which is seen as another rationale for a cut in interest rates.
“In light of recent softer inflation readings, perceptions of downside risks to growth, and global disinflationary pressures, many participants viewed the risks to the outlook for inflation as weighted to the downside,” the minutes said, with Fed officials worrying that inflation expectations might continue to slide, making it harder for the US central bank to achieve its 2 per cent goal.