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Fed Intends To Remain Flexible Regarding Future Interest Rate Cuts

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Citing a lack of clarity about when the risks to the U.S. economy will be resolved, the minutes of the Federal Reserve's latest monetary policy meeting showed the central bank intends to remain flexible regarding future changes to interest rates.

The minutes of the Federal Open Market Committee meeting held in late July showed members plan to pay close attention to the implications of incoming data for the economic outlook.

During the meeting last month, the members of the Fed voted 8 to 2 to lower the target range for the federal funds rate by 25 basis points to 2 to 2-1/4 percent.

The decision to lower rates came even though participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.

However, the Fed noted that financial conditions appeared to be "premised importantly" on expectations that the central bank would cut rates.

The minutes of the meeting officially attributed the interest rate cut to three broad categories of reasons, including signs of deceleration in economic activity in recent quarters, particularly in business investment and manufacturing.

The Fed partly attributed the deceleration to pronounced slowing in economic growth overseas, which likely reflected uncertainties surrounding international trade.

The rate cut was also described as a prudent step from a risk-management perspective, as risks and uncertainties associated with the global economic outlook and international trade remained elevated.

"On this point, a number of participants observed that policy authorities in many foreign countries had only limited policy space to support aggregate demand should the downside risks to global economic growth be realized," the Fed said.

Thirdly, the Fed cited concerns about the outlook for inflation, with a number of participants noting that inflation had continued to run below the central bank's 2 percent target.

A number of participants concluded that the modest increase in market-based measures of inflation compensation over the intermeeting period likely reflected expectations of more accommodative monetary policy in the near future.

The minutes noted that a couple of participants preferred a 50 basis point cut in rates, favoring stronger action to better address stubbornly low inflation.

Meanwhile, Kansas City Fed President Esther George and Boston Fed President Eric Rosengren voted to leave rates unchanged.

The Fed said George believed leaving rates unchanged was appropriate based on the incoming data and the outlook for economic activity over the medium term.

Acknowledging the risks to the economic outlook from trade policy uncertainty and weaker global activity, George indicated she would be prepared to lower rates should incoming data point to a materially weaker outlook.

Rosengren did not see a clear and compelling case for cutting rates given the unemployment rate stood near 50-year lows, inflation seemed likely to rise toward 2 percent, and financial stability concerns were elevated.

The minutes said a few participants expressed concerns the rate cut could be misinterpreted as a negative signal about the state of the economy.

In their discussion about the outlook for rates, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook.

The rate cut at the meeting was described as a "mid-cycle adjustment," with members hoping to avoid any appearance of following a preset course.

"A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook," the Fed said.

The Fed is scheduled to hold its next monetary policy meeting September 17th and 18th, with CME Group's FedWatch Tool currently indicating at 97.3 percent chance of another 25 basis point rate cut.

The central bank is under increasing pressure to cut rates from President Donald Trump, who has repeatedly slammed Fed Chairman Jerome Powell's approach to monetary policy in posts on Twitter.

"Doing great with China and other Trade Deals. The only problem we have is Jay Powell and the Fed. He's like a golfer who can't putt, has no touch. Big U.S. growth if he does the right thing, BIG CUT - but don't count on him! So far he has called it wrong, and only let us down," Trump tweeted ahead of the release of the minutes.

He added, "We are competing with many countries that have a far lower interest rate, and we should be lower than them. Yesterday, 'highest Dollar in U.S. History.' No inflation. Wake up Federal Reserve. Such growth potential, almost like never before!"

Powell, who was nominated by Trump, is scheduled to deliver a closely watched speech on the challenges for monetary policy at the Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming, on Friday.

Michael Pearce, Senior U.S. Economist at Capital Economics, said the Fed minutes left the impression policymakers are just taking their cue from the bond markets.

"We will hopefully get more clarity on future rate cuts when Powell speaks on Friday but, at this point, there is little sign that the Fed is willing to push back on the markets," Pearce said.

He added, "As such, another 25bp cut in September still looks like a good bet, if only because the Fed will not want to disappoint lofty market expectations."

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