Federal Reserve Officials Highlight Deep Divisions at the Central Bank

  • Federal Reserve Officials Highlight Deep Divisions at the Central Bank

Federal Reserve Officials Highlight Deep Divisions at the Central Bank

Both officials issued explanations of their dissents after the blackout period for public comment surrounding Fed meetings ended.

The U.S. consumer sector is in excellent shape but risks to the economic outlook mean that the Federal Reserve will decide the course of interest rates from one meeting to the next, Fed Vice Chair Richard Clarida said on Friday.

The Fed by a 7-3 vote reduced its target overnight policy rate by a quarter of a percentage point on Wednesday, to a level of between 1.75% and 2.0%, to offset slowing global growth and risks associated with Trump's trade battles with China.

Clarida insisted that the split was not a sign that the Fed was having troubles arriving at the proper interest rate setting for the economy. "I can not think of a time where in the aggregate the consumer has been in better shape", Clarida said in an interview with broadcaster CNBC.

The Federal Reserve Bank of NY said it's looking at why banks with excess cash failed to lend to the overnight money market this week, causing the Fed to step in to provide liquidity through overnight repurchase operations, the Financial Times reports. Another five suggested rates might even go up from where they are after Wednesday's cut. He also said that there is "little evidence" that current low unemployment rates constitute a "substantial inflation risk".

The U.S. central bank has conducted a series of cash-adding moves since Tuesday as repo and other money market rates soared to levels not seen since the height of the global financial crisis in 2008.

But in their opposing dissents, Bullard and Rosengren showed the divergence in views.

He was one of three members of the Federal Open Market Committee who dissented, although the other two favoured keeping rates unchanged.

"Additional monetary stimulus is not needed for an economy where labor markets are already tight and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage", Rosengren said. He cited signs that USA manufacturing already appeared in recession.

He said trade policy uncertainty remains elevated and USA manufacturing appears to already be in a recession while inflation continues to fall below the Fed's 2% target. Williams and Evans voted in favor of the latest 0.25% FOMC rate cut while Bullard preferred a more aggressive 50bps rate cut.

What's unusual now is the crisp division and the reasons driving it, all against the political context of a president who wants deep rate cuts for a wholly different rationale.

The Fed will offer three 14-day term repo operations for an aggregate amount of at least $30 billion each.