WASHINGTON/SAN FRANCISCO: US Federal Reserve officials were divided over how seriously to treat a slide in inflation, with one top policymaker saying the Fed was “close” to its inflation target and three others warning the weak price increases posed major risks the Fed may need to attack with lower interest rates, Reuters reported.
Just how deep that division is and where in the debate the most influential policymakers have staked their ground is going to grip the financial world between now and the conclusion of the Fed’s next meeting on July 31. Interest rate futures markets currently see a 100% probability of a rate cut then, with the only debate in trading circles over whether the cut will 25 basis points or twice that.
Policymakers’ rate projections issued on Wednesday showed a near clean break at the Fed. Roughly half of officials see no rate reduction as likely appropriate this year, and roughly half see a cut of up to half a percentage point as probably warranted — a split that may turn on how quickly officials feel they should act.
The division took shape Friday, in the first hours after the lifting of the central bank’s formal “blackout” for commenting on the results of the last two-day policy session, which concluded Wednesday with the Fed leaving rates on hold in a range between 2.25 and 2.5 percent.
“The economy’s baseline outlook is good — sustained growth, a strong labor market and inflation near our objective,” Fed vice chairman Richard Clarida said on Friday in an interview with Bloomberg Television.
Clarida said there was “broad agreement” that the case for rate cuts had grown stronger in recent weeks. He also said the Fed was ready to act “as appropriate,” a phrase emphasized by Chairman Jerome Powell earlier this month as markets slid over broad global growth and trade concerns.
But Clarida’s description of the current 1.5 percent inflation rate expected this year as “close” to the Fed’s 2 percent target suggested less compulsion to move soon.
Powell, asked after this week’s policy meeting about the danger of delaying any policy move, said “I don’t think the risk of waiting too long is prominent right now.” Others seemed to disagree.
“Recent indicators of inflation and inflation expectations have been disappointing,” Fed Governor Lael Brainard said on Friday in prepared remarks to a Fed conference in Ohio. With rates so low by historic standards, “basic principles of risk management...would argue for softening the expected path of policy when risks shift to the downside.”
Other problems have cropped up for the Fed, most notably the unpredictable path of U.S. trade negotiations, and signs that global economic growth may be slowing. U.S. economic data has also been choppy, with a weak recent jobs report and signs the manufacturing sector is slowing.
But the shortfall of inflation from the Fed’s 2 percent target has become a persistent problem for the Fed, putting its credibility and the performance of the economy at stake.
While the Fed’s mandates from Congress refers to maintaining “stable prices,” central bankers globally feel that a bit of inflation is healthy. It allows wages and prices to rise steadily, encouraging businesses and households to spend and invest. For the central bank it provides room for them to keep interest rates above zero and, therefore, be able to react to a downturn with interest rates cuts alone.