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Fed Minutes Show Some Participants Preferred Smaller Rate Cut

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Minutes from the Federal Reserve's emergency monetary policy meetings in March showed a few participants preferred a smaller interest rate cut to slashing rates by a full percentage point at the March 15th meeting.

The minutes said some meeting participants favored cutting rates by 50 basis points, noting that such a decision would provide support to the economy in the face of coronavirus outbreak while preserving the Fed's ability to lower rates again in the event the economic outlook deteriorated further.

The participants also noted that cutting rates by 100 basis points less than two weeks after an emergency 50 basis point cut ran the risk of sending an overly negative signal about the economic outlook.

Nonetheless, the Fed ultimately voted to slash rates by 100 basis points to a range of zero to 0.25 percent, pointing to the likely near-term decline in economic activity due to the coronavirus outbreak and the extremely large degree of uncertainty about the length and severity of the decline.

Cleveland Fed President Loretta J. Mester voted against the action, preferring to reduce the target range for the federal funds rate to 0.5 to 0.75 percent.

The minutes noted Mester was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses.

With regard to the economic outlook, meeting participants raised several alternative scenarios with regard to the likely behavior of economic activity in the second half of the year.

The Fed noted these scenarios differed from one another in the assumed length and severity of disruptions to economic activity caused by the coronavirus pandemic.

Several participants suggested the negative effects on economic activity would not necessarily be as long-lasting as those associated with the previous decade's financial crisis.

They emphasized the temporary nature of the shock to economic activity, the fact that the shock arose in the non-financial sector, and the healthy state of the U.S. banking system.

Meanwhile, participants prominently cited the possibility of the virus outbreak becoming more widespread than expected as among the downside risks to the U.S. economic outlook.

"Such an event could lead to more wide-ranging temporary shutdowns, with adverse implications for the production of goods and services and for aggregate demand," the Fed said.

The minutes also reiterated the Fed's previous stance that it would be appropriate to maintain rates at the current near-zero levels until policymakers were confident that the economy had "weathered recent events."

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