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Fed Minutes Will Show Rate Lean After September Cut

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10/09/2019 | 06:05am EDT

By Nick Timiraos

The Federal Reserve will provide new clues about its thinking on where to set interest rates when it releases the minutes of its Sept. 17-18 meeting on Wednesday at 2 p.m. EDT.

Officials reduced rates by a quarter percentage point and left the door open to more cuts. The meeting also began amid a breakdown in money market functioning that sent the central bank's benchmark short-term rate rising above its target range. The minutes will show how officials evaluated that situation at the time. Here's what to watch:

Policy Positioning

Fed officials lowered their benchmark rate to a range between 1.75% and 2%, but they were divided over the decision. The minutes should provide more detail on the internal debate, including whether more officials thought another cut might not be warranted at their Oct. 29-30 meeting.

Of course, the minutes describe events from three weeks ago. Since then, the September employment report released Friday doused fears of a sharp slowdown but didn't provide a strong signal about where the economy is headed. A widely watched survey on factory activity last week indicated the U.S.-China trade war and slow global growth are a serious drag on the export sector, and a separate survey on service-sector activity hinted at a possible spillover to the broader domestic economy.

Growth and Inflation

Fed officials could read the current economic data in one of two ways. Some officials could conclude the recent slowdown is exactly what they anticipated when they cut rates twice this summer, limiting the need for another reduction in October. Others could read the weakness as more pronounced than anticipated and warranting a third cut now.

How the minutes recount last month's discussion on the growth outlook could help clarify how officials perceived the risks to the economy and the appropriate policy responses.

Meantime, a recent upturn in monthly inflation data could confirm officials' views earlier this year that a slowdown was transitory. The spring softness in inflation readings helped lay the case for this year's rate cuts, but minutes from the July meeting show it wasn't the primary motivating factor. How officials regard somewhat better inflation readings against a still gloomy global growth and risk backdrop should clarify how they will set policy at coming meetings.

Committee Cleavages

If the minutes reveal signs of stronger-than-expected resistance among officials to rate cuts, that could tamp down market expectations of future stimulus.

Interest-rate projections released at the September meeting showed seven of 17 officials penciled in one more rate cut this year. Five thought the rate cut was a mistake, and five thought it was appropriate but penciled in no further cuts.

Balance Sheet Briefings

Shortages of funds that banks were willing to lend on Sept. 16 and 17 led interest rates in very short-term lending markets to rise sharply. Just before the Fed began its meeting on Sept. 17, the Fed injected billions of dollars of cash to pull rates down into their target range.

The minutes should outline two important discussions revealing the central bank's immediate response to this market dysfunction.

First, the briefing from executives at the New York Fed will show how those at the front lines of managing the central bank's market operations judged the size, scope and potential solutions of the recent problems.

Among the questions they faced -- then and now: Why didn't banks feel comfortable lending reserves held at the Fed into overnight money markets as rates soared higher in those markets? Was it because reserves reached a scarce level sooner than the Fed anticipated? Or did other factors -- including bank supervision practices or changes in market structure -- explain this behavior?

How these managers framed their initial impression of the volatility could influence how the Fed responds at its October meeting.

Second, the minutes will show how Fed officials responded to these briefings. They face greater urgency now to resolve a series of nuts-and-bolts decisions that they have deferred, including when and how to resume increasing the size of their balance sheet and whether to create new tools to reduce money market volatility.

To be sure, these discussions could be somewhat stale after Fed Chairman Jerome Powell on Tuesday said the central bank would begin purchasing shorter-term Treasury securities in order to boost reserves to levels high enough to prevent a re-run of last month's funding-market dysfunction.

Write to Nick Timiraos at nick.timiraos@wsj.com

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