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Fed Debate on Risks Intensifies Around Post-September Rate Hikes


By Craig Torres


  • Officials say another rate rise may be appropropriate ‘soon’

  • Trump’s pressure, policies on trade complicate Fed outlook

As U.S. central bankers prepare to raise borrowing costs next month, their discussion about how high to lift their target interest rate is intensifying.

Their forecasts call for strong labor markets and robust growth at a time when inflation is already slightly above their goal. At the same time, there are potential headwinds from trade disputes, waning fiscal stimulus and the lurking danger of financial instabilities that tend to build up over long periods of low policy rates during lengthy expansions.

The minutes released Wednesday from the Federal Open Market Committee’s July 31-Aug. 1 meeting left little doubt that Chairman Jerome Powell plans to raise the benchmark lending rate next month, saying “it would likely soon be appropriate to take another step in removing policy accommodation.”

“They are clearly having a debate about how much they hike,” said Seth Carpenter, chief U.S. economist for UBS Securities Inc. and a former senior adviser at the Fed Board. “They did talk a lot about risks, and downside risks from trade in three or four areas.”

The signals came despite scrutiny from President Donald Trump, the man who appointed Powell and who told Reuters in a recent interview that he was “not thrilled” with the Fed’s tightening.

Finding Neutral

A September hike would put the benchmark lending rate in a range of 2 percent to 2.25 percent, just under the bottom of officials’ 2.3 percent to 3.5 percent range of estimates for the so-called neutral rate -- economics lingo for the level that neither stimulates nor holds back the economy.

While the minutes made no mention of political heat, they were full of downside risks stemming from Trump policies. All Fed officials viewed trade disputes “as an important source of uncertainty and risks.” Still, a number of officials noted that “most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring but might do so if trade tensions were not resolved soon.”

For all the “sound and fury they have in the minutes” on trade, “you don’t come away with tangible growth effects that are actually occurring," said Michael Feroli, JPMorgan Chase’s chief U.S. economist.

He added there was little indication that Fed officials are setting up a pause in their cycle of rate hikes. Indeed, the minutes used the plural form, noting that “further gradual increases” in their target rate “would be consistent” with their policy goals.

In its presentation to the FOMC’s most recent meeting, the staff forecast continued to project that the economy would grow “at an above-trend pace,” and also signaled there is more slack in the job market as they expected labor force participation to move up.

“What the minutes told us is that they are soon moving into the range of estimates for a neutral policy rate, and it isn’t clear when they are going to stop,” said Laura Rosner, senior economist at MacroPolicy Perspectives LLC in New York. “But I think they are more concerned about overdoing it than underdoing it in terms of tightening.”

Underscoring that point, the minutes said many officials noted that it would likely be appropriate to remove “fairly soon” their description of policy as accommodative.

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