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- Federal Reserve decision makers have become increasingly divided over how to weigh the signs of tension on the economy against ever-strong growth.
- At its last meeting in July, the Federal Committee for Liberalization of Public Procurement was already split on the decision to reduce its benchmark interest rate by a quarter of a percentage point.
- Developments since this meeting seem to have only increased the division between FOMC members.
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A week after the outbreak of a major warning about the recession for the first time in more than a decade, Federal Reserve decision makers have become increasingly divided over how to weigh the signs of tension on the economy. 39 economy compared to a still solid growth.
At its last meeting in July, the Federal Committee for Liberalization of Public Procurement was already split on the decision to reduce its benchmark interest rate by a quarter of a percentage point. Some thought that a bigger discount should have been made, Wednesday's minutes showed, while others were strongly opposed to any adjustment.
"The events since the July meeting will only further separate these two factions and pose a real challenge to President Powell, who is trying to present a united front ahead of the September meeting," said Curt Long, chief economist for the National Association of Credit Unions Assured by the Federal Government.
The yield curve reversed for the first time since last week before the global financial crisis of 2007, resulting in a sharp decline in financial markets as investors saw it as a sign of a potential recession. Business investment and factory activity have weakened in recent months.
But other measures of growth held up better than expected before the FOMC announcement of 18 September. Unemployment rates have reached unprecedented levels for most of the year. Consumer spending, which accounts for more than two-thirds of economic activity, exceeded expectations.
According to the minutes, inflation readings, which have been below target for months, were one of the main factors behind the July cut. In an editorial released on Wednesday by the Financial Times, Neel Kashkari, chairman of the Fed in Minneapolis, said the FOMC should pledge not to raise interest rates as long as inflation does not will not be 2%.
"In the absence of a surprise reversal of these economic developments, I will argue that we should not only lower the federal funds rate, but also that we should also use the forecasts to give the government the opportunity to do so. Saving even more dynamism than a rate cut alone can not produce, "he wrote.
Kashkari said that if policy makers preemptively signal that rates would stay low, they might be able to avoid lowering interest rates to zero.
"If a central bank reduces rates to zero in response to a recession and then announces its intention to keep rates low, it may actually be perceived as a sign of weakness rather than strength," Kashkari said. "It's like driving a car into a ditch and then declaring that you stay there by choice. In reality, you can not go out. It's best to avoid it first. "
But others have remained less convinced since the July meeting, where some FOMC members expressed concern that further easing would pose a risk to financial stability or be misinterpreted as a negative sign of economy.
Two Fed policymakers diluted their hopes for cuts Thursday in September, saying they did not think for the moment that other stimulus measures were needed.
Philadelphia Fed President Patrick Harker told CNBC that he thought the central bank should "stay here a moment to see how things go". In an interview with Bloomberg, Esther George, president of the Kansas City Fed, said that the outlook for an additional adjustment should be changed.
"I would be happy to let the rates here be absent, with either weakness or reinforcement, a kind of upside risk that would make me think that rates should be elsewhere," said Esther.
A much anticipated speech by Powell at the Jackson Hole Symposium on Friday, scheduled to begin at 10:00 am ET, could further illuminate the direction the central bank is taking.
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