Fed Minutes Show Officials Cautious Over Rate Cuts

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00:00The Federal Reserve's minutes from its September 16th to 17th meeting.

00:05Mike, what are the key headlines?

00:08Well, the minutes say that almost all of the participants, which is Fed speak for all but one,

00:14supported a quarter point cut at this September meeting.

00:16Stephen Myron, of course, the new governor, was the only one who wanted a half point cut.

00:21But the minutes do suggest there were some more hawkish views.

00:24A few participants stated there was merit in keeping the federal funds rate unchanged at this meeting, the minutes say,

00:31or they could have supported such a decision.

00:34And most participants emphasized upside risks to their outlook for inflation in the discussion about the economy.

00:42Much of that discussion revolving around inflation, with the hawks noting progress towards the Fed's 2 percent target had stalled,

00:49which raised the risks of inflation expectations rising.

00:53The weakening of the labor markets carried the day, however.

00:56Officials indicating their outlooks for the labor market were uncertain,

01:01and they viewed downside risks to employment as having increased.

01:05They cited a number of indicators, including low hiring and firing rates,

01:10concentrated job gains in a small number of sectors,

01:13and increases in unemployment for groups that are traditionally showing greater sensitivity to the weakening economy,

01:20including African Americans and young people.

01:22There were a range of views, the minutes say,

01:25about the degree to which the current stance of monetary policy was restrictive,

01:29and about the future path of policy.

01:32Most participants judging that it would likely be appropriate to ease policy further over the course of the year,

01:39but some noting by several measures,

01:41financial conditions suggested monetary policy may not be particularly restrictive,

01:46which suggested a cautious path ahead.

01:49There was a brief discussion of the balance sheet,

01:52but reserves continued to appear abundant, the participants felt,

01:56and no changes were suggested.

01:58So the minutes kind of tell a story of a divided Fed,

02:01and that's what we got basically in the dot plot,

02:04with almost even division between further cuts and some people wanting just one and some none.

02:10So clearly a divided Fed here, and of course we have a Fed meeting coming up later this month here,

02:16and the dual mandate still remains paramount here, maximum employment and stabilization of prices.

02:21Where do you think the Fed should really be focusing on right now?

02:26Well, you have a real division on Wall Street about that.

02:29A number of economists are pointing to the inflation figures that we have seen lately,

02:33and suggesting that we have not yet seen the worst of the tariff pass through into inflation and prices,

02:40and that that is something to be concerned about.

02:43Others are still concerned about the weakening of the labor market,

02:46and the idea that that suggests a weakening of the economy ahead.

02:50But there's also a division in terms of labor on whether this is a supply problem,

02:55because the administration has deported so many people who aren't now going to be able to take jobs,

03:00or a demand problem with companies seeing the economy slowing and not wanting to produce as much.

03:06The bottom line is the Fed would like to have a lot more data to give it a clue as to which way we're going this month,

03:12but they don't have it right now.

03:14So the tough thing is going to be using alternative indicators to figure out where they are

03:19and what that might be telling them they should do.

03:22Mike, you mentioned that there was just some mention of the balance sheet.

03:26It seems like this is becoming a hotter topic of late, with market participants hoping for some more guidance on this.

03:33Why is that?

03:33Why is this rearing its head right now?

03:36Well, we're getting to the point, Scarlett, where market participants in the money markets

03:41are suggesting that we're getting to the level of Fed funds reserves that are at the borderline

03:49for whether or not there's enough available.

03:52We did see a one basis point jump in the effective Fed funds rate recently,

03:57and some people were pointing to that as a sign that this is coming.

04:02So the question is, when did they stop QT?

04:05When did they stop their overall reduction in the balance sheet?

04:09And it doesn't appear that on the 16th and 17th they were ready to do that.

04:13They still felt reserves were abundant enough,

04:15but it does suggest the fact that they brought it up that they're getting closer to the decision point.

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