October FOMC Meeting Minutes Preview

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The US Federal Reserve Bank will be releasing their meeting minutes today. The minutes cover the central bank’s monetary policy meeting held on October 30th this year.

The minutes will be interesting as they cover the meeting where the Fed cut rates, yet indicated that it would be pausing its rate cut cycle.

Interest rates were cut for the third time this year, bringing the Fed funds rate to 1.5% – 1.75%. The central bank cited various risks including the global developments to justify its rate cuts. It hopes that the rate cuts will help the US economy to stave off a recession.

Fed Funds Rate
Fed Funds Rate, October 2019

There has been an increase in concerns over the recession in the US economy. The US economy is currently enjoying the longest stretch of economic expansion to date. Therefore, economists are rightfully concerned about the implications.

The business cycle, at some point, is naturally expected to head into contraction.

US economic growth has seen that trend this year. This is evident from the latest GDP reports. The third-quarter GDP report covering the three months ending September 2019 showed a 2.0% expansion.

This marks one of the slowest patches of expansion in recent history. Therefore, it was a no-brainer for the Fed to cut rates. That being said, the cuts were not unanimous.

There were two dissenting voters who voted in favor of leaving rates unchanged. The dissenting votes came from Boston Fed President Eric Rosengren and the Kansas City Fed President, Esther George. Both these FOMC voters dissented across all the previous rate cuts as well.

Will the Fed minutes Spring a Surprise?

For the minutes to have any impact on the markets, they need to include a surprise. Given that officials already indicated their intention to pause further rate cuts, it is unlikely.

However, there is still a chance that a number of other Fed members might have felt that a rate cut was unnecessary. In the past week, a number of Fed members took to the stage.

Most importantly, Fed Chair, Jerome Powell gave his two-day testimony to US lawmakers. In his prepared remarks, Powell said that the current interest rates were sufficient for the economy.

He was hopeful that the lower rates would help the economy rebound. The slump in the third quarter was brushed aside. According to Powell, the declines in growth were largely due to the auto workers’ strike.

But besides growth, inflation also remains a concern for the Fed. Headline CPI has been stubbornly low. It is currently averaging around 1.7%. While this is close to the Fed’s 2% inflation target rate, there has been no evidence of price pressures.

As a result, the central bank is willing to wait for inflation to overshoot the Fed’s 2% inflation target rate. It hopes that this will help make up for years of low inflation. But, the evidence so far proves otherwise.

At the previous meeting, the markets were expecting the Fed to cut rates once more this year. But with the Fed coming out clear that it was done with rate hikes, the markets have been realigning themselves.

Will Trade Talks Have the Answer?

It would be prudent to expect the Fed to begin raising rates once again next year. It is quite likely that interest rates will remain near the current levels for the foreseeable future.

The biggest outlier is, of course, the US-China trade talks. The trade talks have been dragging on with no clear outcome in sight. The markets continue to trade mixed to mere rumors on progress.

The latest GDP data also showed that among all the components, trade was a drag with exports rising just 0.7% while imports grew 1.2% during the period.

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