MNI REVIEW: Fed Signals Possible Third Cut, But Divisions Grow

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve signaled it could cut interest rates

a third time this year, and expand its balance sheet sooner than expected to

relieve market strains, but a growing number of officials oppose further

monetary easing.

     The Federal Open Market Committee lowered its key overnight borrowing rate

by another quarter-point Wednesday to 1.75% to 2%, on concern over weakening

global growth and the U.S.-China trade war. But, while seven of 17 members

penciled in a third such move by the end of the year, the remaining 10 officials

were evenly split between those who saw no need to lower rates again and those

who would have preferred no cut at all Wednesday.

     Though the U.S. economy has performed "roughly as expected," output has

"weakened further" in Europe and China, and trade policy developments have been

"a big mover of markets and of sentiment" over the past six weeks, Fed Chair Jay

Powell told reporters at the conclusion of the FOMC meeting.

     U.S. exports and investment have been soft and purchasing manager indexes

suggest more weakness may be coming, he said.

     "I think that the idea that we see trouble approaching on the horizon, you

steer away from it, if you can, I think that's a good idea," Powell told

reporters after the conclusion of the FOMC meeting. "History teaches us that

it's better to be proactive in adjusting the policy if you can."

     --'MEETING BY MEETING'

     Powell pushed back against the idea that the Fed had an easing bias and

emphasized that the FOMC would look carefully at economic data "meeting by

meeting," reiterating its promise to "act as appropriate" to sustain the

expansion.

     Three dissenting votes Wednesday added to the uncertainty around rate path

views. As in July, Boston Fed President Eric Rosengren and Kansas City Fed

President Esther George did not want any rate cut, while St. Louis Fed President

Jim Bullard dissented in favor of a half-point cut.

     "we'll be looking at evolving geopolitical events. We'll be looking at

global growth, trade policy uncertainty -- most importantly, looking at the

performance of the U.S. economy," Powell said, calling the current set of global

circumstances "an unusual situation."

     --MARKET CHAOS CONTAINED

     Powell expressed confidence that repo operations of the sort carried out by

the New York Fed this week to keep its policy rate trading inside the FOMC's

target range would sufficiently address the acute money market pressures that

arose suddenly this week, but conceded that the Fed may need to expand its pool

of reserves sooner than expected.

     A strong demand for cash pushed overnight repo rates as high as 10% this

week while the fed funds rate traded above the target range, prompting the New

York Fed to inject $75 billion into repo markets for the first time since the

financial crisis. The Fed also lowered its interest paid on excess reserves by

an extra 5 bps as it cut rates.

     "These temporary operations were effective in relieving funding pressures

and we expect the federal funds rate to move back into the target range," Powell

said, adding that the Fed is prepared to do more if needed.

     While stressing that these issues have "no implications for the economy or

the stance of monetary policy," Powell acknowledged that the Fed might have to

address the underlying problem.

     "It's possible that we'll need to resume the organic growth of the balance

sheet earlier than we thought," he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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