Two Federal Reserve officials highlight deep division

James Bullard, head of the St. Louis Fed branch, dissented in favour of a bigger half-point cut. He argued that a larger reduction would have provided needed insurance against a sharper slowdown.

Both officials issued explanations of their dissents after the blackout period for public comment surrounding Fed meetings ended.

In a CNBC interview Friday, Vice Chairman Richard Clarida, who supported the latest quarter-point rate cut, said healthy debate is a strength of the Fed system.

The Fed approved a second quarter-point rate cut on Wednesday by a vote of 7-3, the first time there have been as many as three dissents since September 2016 and the first time that there had been dissents going in opposite directions in nearly five years.

Clarida insisted that the split was not a sign that the Fed was having troubles arriving at the proper interest rate setting for the economy.

“The Fed has a long tradition of candid, frank discussion about the economy. I think it is a strength of our system,” he said Friday.

The Fed’s quarterly assessment of the course of rates, known as the “dot plot,” showed a wide range of views. Five Fed officials projected rates will stay where they are now, and another seven said they expect a third rate cut this year. Another five suggested rates might even go up from where they are after Wednesday’s cut.

“There is a range of views on the committee right now about the appropriate level of rates to sustain the expansion,” Clarida said. “I think it also comes down to risk management […]. We think of the adjustment we made this week and in July as providing some insurance against some downside risks.”

But in their opposing dissents, Bullard and Rosengren showed the divergence in views.

Rosengren, who along with Esther George had also dissented in July when the Fed first cut rates, said that he saw the rate cuts as unnecessary.

“Additional monetary stimulus is not needed for an economy where labour markets are already tight and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage,” Rosengren said.

However, in his explanation for why a bigger half-point cut was needed, Bullard pointed to signs that U.S. economic growth could slow further in coming months at a time, raising risks of a recession. He said trade policy uncertainty remains elevated and U.S. manufacturing appears to already be in a recession while inflation continues to fall below the Fed’s 2% target.

“It is prudent risk management, in my view, to cut the policy rate aggressively now, and then later increase it should the downside risks not materialize,” Bullard said.

George did not issue an explanation for her dissent against this week’s rate cut.

The Fed’s next meeting is Oct. 29-30. Many private economists believe the Fed will cut rates by another quarter point at either that meeting or the final meeting of the year in December.