WASHINGTON (Reuters) – After delivering a split-decision rate cut earlier this week, U.S. Federal Reserve officials on Friday squared off over where the economy stands and what should be done about it.
FILE PHOTO: James Bullard, President of the St. Louis Federal Reserve Bank, speaks during an interview with Reuters in Boston, Massachusetts August 2, 2013. REUTERS/Brian Snyder/File Photo
St. Louis Federal Reserve president James Bullard and Boston Federal Reserve president Eric Rosengren both dissented against the quarter of a percentage point rate reduction, approved on a 7-3 vote.
But they did so from opposite ends of a spectrum that now runs from open talk of recession to warnings of a risky financial meltdown if the Fed continues cutting rates and encouraging debt.
In explaining his vote against the rate reduction, Bullard in a written statement said that he wanted an even larger cut, of half a percentage point, because the U.S. manufacturing sector “already appears in recession” and overall economic growth is expected to slow “in the near horizon.”
GRAPHIC: A manufacturing recession – here
The Fed 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 in part with President Donald Trump’s trade battles with China.
It was the second Fed rate reduction this year.
Rosengren released his dissent statement roughly two hours later, warning that while the U.S. economy did face risks from an ongoing trade war with China and other forces, “lowering rates to address uncertainty is not costless.”
The Fed’s current target interest rate, he noted, is both increasingly “accommodative” – meaning it is nudging people to borrow and spend – and below the current estimated rate of inflation, so on a cost-adjusted basis is in fact less than zero.
With the unemployment rate near its record low, “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 wrote.
He is expected to elaborate on his remarks later in the day. Fed vice chairman Richard Clarida is also expected to talk publicly as is Dallas Fed president Robert Kaplan.
The Fed decision this week left the central bank split into three roughly equal camps, with seven members projecting one more rate reduction this year, five seeing no change, and five expecting that a rate hike will be appropriate by the end of the year.
The debate has turned on a variety issues, including differing levels of concern about weak inflation and recent developments in global bond markets.
But an emerging focus may be whether the U.S. economy is cooling faster than anticipated and in need of more support from the central bank.
Bullard’s dissent, his second of the year, suggests he feels there is reason to worry.
While he also mentioned inflation and financial market development, the statement leaned heavily on risks to growth.
“It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize,” Bullard wrote. “Many estimates of recession probabilities have risen from low to moderate levels.”
This week’s meeting marked the first meeting with three dissents since Sept. 2016, when Rosengren joined two others in arguing for a rate increase.
The third dissenter at this week’s meeting, Kansas City Fed president Esther George, voted along with Rosengren against a rate cut in July, as well, for similar reasons.
Reporting by Howard Schneider; Editing by Kim Coghill and Nick Zieminski