Fed Officials Last Month Worried Trade War Could Hurt Hiring, Consumer Spending

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Fed Chairman Jerome Powell speaking after the central bank’s monetary-policy meeting on Sept. 18 in Washington. Photo: olivier douliery/Agence France-Presse/Getty Images

WASHINGTON—Federal Reserve officials worried that slowing global growth and rising trade-policy uncertainty could exert a drag on hiring and the U.S. economy when they cut interest rates last month.

Between officials’ meeting in late July and in mid-September, “a clearer picture of protracted weakness in investment spending, manufacturing production and exports had emerged,” said minutes of the Sept. 17-18 policy meeting, which were released on Wednesday.

Officials expressed worry that weakness in business investment, trade and manufacturing could eventually erode consumer spending, which has been the main engine of growth for the U.S. economy in recent years. Some officials also pointed to models that in recent months indicated a rising likelihood of recession over the medium term.

“One risk that the economy faced was that the softness recorded of late in firms’ capital formation, manufacturing and exporting activities might spread to their hiring decisions, with adverse implications for household income and spending,” the minutes said.

Fed officials voted at that meeting to cut interest rates by a quarter percentage point to their current range between 1.75% and 2%.

Risks from global developments have made Fed officials reluctant to say more about coming policy moves. The minutes of last month’s meeting didn’t provide a firm sign, but a spate of weak factory data and other signs of a slowdown since then have fueled market expectations of another cut in October.

Senior Fed officials have not expressly pushed back against those expectations in recent public comments.

The committee has been divided in recent months over how aggressively to forestall potential economic weakness by cutting rates. Three officials dissented from last month’s monetary-policy decision, with two preferring no action and one preferring a larger, half-point cut.

Interest-rate projections released at the September meeting showed seven of 17 officials penciled in one more rate cut this year. Five thought the rate cut was a mistake, and five thought it was appropriate but penciled in no further cuts.

On Tuesday, Fed Chairman Jerome Powell again compared the current sequence of rate cuts to two episodes in 1995 and 1998 when the Fed cut interest rates three times in a few months.

“The Fed cut, and then cut again, and then cut a third time,” he said. “The economy took that accommodation onboard and gathered steam again, and the expansion continued. So that’s the spirit in which we’re doing this.”

Some Fed officials may read softer economic data as confirmation of the slowdown they anticipated when they cut rates twice this summer, but others may see it as a more concerning development that warrants another cut this month.

Mr. Powell acknowledged risks to the U.S. economy from global developments during his remarks Tuesday, but played down any worries about a recession on the horizon.

“Clearly, things are slowing a bit now…but [growth] may just be gathering itself,” he said. “There’s no reason why the expansion can’t continue.”

While officials’ baseline outlook for the economy remained favorable at last month’s meeting, most of them premised that outlook on the Fed cutting rates as anticipated by financial markets, the minutes said.

Officials said they didn’t see much evidence of industrial activity picking up at last month’s meeting, with trade policy uncertainty “contributing importantly to these declines,” the minutes said.

Meantime, steady job growth was set against the backdrop of recent revisions to hiring in 2018 that showed a slower expansion that previously reported. The development prompted a few officials to urge vigilance in monitoring “any sign of softening in labor market conditions.”

Moreover, several officials said that because monetary policy worked with a lag, “it was appropriate to provide the requisite policy accommodation now to support economic activity over coming quarters,” the minutes said.

Some officials opposed last month’s rate cut because they didn’t think recent risks would derail the expansion, and they wanted to see stronger evidence that uncertainty was leading to weaker growth before cutting rates.

A few unidentified officials at last month’s meeting also expressed concern that market expectations of up to a percentage point in rate cuts over the coming year were out of step with the rate-setting committee’s current outlook.

These officials thought “it might become necessary for the committee to seek a better alignment of market expectations regarding the policy rate path with policymakers’ own expectations for that path,” the minutes said.

As a result, some of these officials wanted the Fed to provide more specificity about when it might be done cutting interest rates in response to rising trade policy uncertainty, the minutes said.

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