FOMC minutes showed members remain divided on policy – UOB

Senior Economist at UOB Alvin Liew assessed the recent publication of the FOMC minutes of the September meeting.

Key Quotes

“The September FOMC minutes showed most Fed policy makers supported a 25bps rate cut to a range of 1.75-2.00% in that meeting. They were generally more concerned about trade policy uncertainty and risks, and external headwinds to the US economy, and they also agreed that “policy was not on a preset course.” But there was little consensus beyond that, and policy makers were divided on the future path of US monetary policy. The minutes were certainly consistent with the spilt in policy path outlook reflected by the latest September Dot Plot chart”.

“The Fed policy makers also discussed about the developments in US money markets and measures that helped ease the strains in these markets. Policymakers agreed recent money market developments implied the Fed should soon discuss the “appropriate level of reserve balances” but “should be clearly distinguished from past large-scale asset purchase programs” (i.e. not another QE program). FOMC Chair Powell (8 Oct) said the “time is now upon us” to expand balance sheet to maintain appropriate level of reserves and he specifically emphasized that the growth of balance sheet for reserve purposes should not be confused with quantitative easing”.

“Despite the split in in policy path outlook among Fed policy makers, a key consideration is that there has been a weakening in US economic data after the September FOMC, and that has reinforced expectations for more monetary policy easing. After the two 25bps cuts in Jul and Sep, we still project two more 25bps “insurance” rate cuts at the 29/30 Oct and the 10/11 Dec FOMC, bringing the upper bound of the FFTR lower to 1.5% and well below the 2% inflation target. We have not factored in further cuts in 2020 as we expect some sort of US-China trade deal (i.e. interim agreement) happening by 1H 2020. However, if trade tensions persist well into next year, then we think the Fed will have to take on more easing in 2020, especially if it leads to material downside impact to US and global growth”.

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