Federal Reserve minutes cast doubt on December US interest rate cut

Fed officials appear increasingly uncertain about which side of dual mandate requires attention

US Federal Reserve chairman Jerome Powell in October. EPA

Federal Reserve officials were at odds over cutting interest rates last month, as minutes released from their October meeting on Wednesday showed more central bankers uncomfortable about reducing rates in December.

“In discussing the near-term course of monetary policy, participants expressed strongly differing views about what policy decision would most likely be appropriate at the committee's December meeting,” minutes from the Fed's October 27-28 meeting read.

“Many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year.”

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The minutes appear to reflect remarks made in Fed Chair Jerome Powell's post-meeting press conference last month, where he said a December rate cut was “not a foregone conclusion. Far from it".

The Federal Reserve cut US interest rates by 25 basis points in a 10-2 decision last month, bringing its target range for the federal funds rate down to between 3.75 and 4 per cent.

Central banks in the UAE and Saudi Arabia joined others in the Gulf Co-operation Council in following suit. Only Kuwait, where the dinar is tied to a basket of currencies, held rates steady.

Investors have shifted their December rate cut expectations from about 94 per cent one month ago to about 33 per cent today, according to CME Group data.

Growing divisions

Fed officials are growing increasingly divided over which side of their dual mandate requires greater attention: tackling inflation or shoring up a stalling labour market.

The labour market's current low-hire, low-fire environment comes as inflation has “shown little sign of returning sustainably”, the minutes read.

Further complicating the Fed's near-term decisions was the 43-day government shutdown, which blocked the US central bank from access to key economic data it relies on to assess the health of the economy.

“Many participants agreed that the committee should be deliberate in its policy decisions against the backdrop of these two-sided risks and reduced availability of key economic data,” the minutes read.

The Fed's rate-setting Federal Open Market Committee comprises 12 members: the seven members who serve on the Fed's board of governors, the president of the New York Fed and four other regional Fed presidents who serve rotating one-year terms. Seven other members take part in a non-voting capacity.

The minutes showed disagreement over how “restrictive” the Fed's current policy is for the US economy. Public remarks made since then show that the Fed is split into three camps: hawkish members who favour keeping rates steady; doves who are pushing for cuts; and more neutral members such as Mr Powell.

Federal Reserve governor Christopher Waller. EPA

Fed governor Christopher Waller, who is among the dovish contingent, said this week that the labour market remains weak, and dismissed ideas that a lack of government data from the shutdown prevented the Fed from having a whole view of the economy.

But there remains a growing hawkish continent, notably among the regional Fed presidents, who continue to voice concern that inflation remains above the Fed's 2 per cent target.

Two of those members are St Louis Fed president Alberto Musalem and Kansas City Fed president Jeffrey Schmid. Both are voting members on the FOMC this year, with the latter dissenting last month because he favoured holding rates steady.

Kevin Burgett, an economist at the LHMeyer/Monetary Policy Analytics, said most of the support on either side has come from familiar sources.

“Most policymakers continue to suggest that they’re truly undecided about the December decision or could go along with either outcome, complicating a simple tabulation of views,” Mr Burgett wrote to clients.