- Federal Reserve policy makers have become increasingly divisive about weighing the signs of financial stress against continued solid growth.
- The policy-setting Federal Open Market Committee was already sharply divided over the decision to lower the reference rate by a quarter of a percentage point at the last meeting in July.
- The trend since that meeting seems to have only increased the divide among the FOMC members.
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One week after a key recession warning flashed for the first time in more than a decade, Federal Reserve policy makers have become increasingly divisive about weighing the signs of financial stress on continued solid growth.
The Federal Open Market Committee's political decision was already sharply divided over the decision to lower the reference rate by a quarter of a percentage point at its last meeting in July. Some felt that a bigger cut should have been made, showed minutes Wednesday, while others were adamant about adjusting at all.
"The events since the July meeting will only lead these two factions further apart and present a real challenge to Chairman Powell as he tries to present a united front ahead of the September meeting," said Curt Long, chief economist at the National Association of Federally-Insurance Credit Union .
The yield curve inverted for the first time before the global financial crisis in 2007 last week, which sent financial markets sharply lower as investors saw it as a signal of a potential recession ahead. Business investment and factory activity have declined in recent months.
But other measures for growth have held up better than expected ahead of the announcement of the FOMC on September 1
The protocol said that inflation readings, which have been below target for several months, were a main driver behind the cut in July. In a Financial Times call on Wednesday, Minneapolis Fed President Neel Kashkari said the FOMC should pledge not to raise interest rates until inflation hits 2%.
"Lacking any surprising reversal in this economic trend, I would argue that not only should we cut the federal fund rate, but that we should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver, "He wrote.
Kashkari said that if policy makers in advance signal that interest rates will remain low, they may be able to avoid lowering interest rates to zero.
" If a central bank cuts interest rates to zero in response to a downturn and then announces That it plans to keep interest rates low may actually be seen as a sign of weakness rather than strength, "Kashkari added." It's like driving a car in a ditch and then declaring that you stay there by choice. The reality is you can't get out. It's better to avoid it in the first place. "
But others have remained less convinced since the July meeting, where a few FOMC members expressed concern that further relief could pose a risk to financial stability or be misinterpreted as a negative signal.
Two Fed politicians dimmed hopes of a September cut, saying they did not yet believe further stimulus was needed.
Philadelphia Fed President Patrick Harker told CNBC he believed the central bank should "stay here for a while and see how things play out." In an interview with Bloomberg, Kansas City Fed President Esther George said there had to be changes in the prospects for further adjustment.
"I would like to leave rates absent when they see some weakness or some strengthening, some kind of upside risk that would make me think interest rates should be somewhere else, "Esther said.
A much-awaited speech from Powell at the Jackson Hole Symposium on Friday, which will begin at 10 a.m. ET, could shed more light on where the central bank is headed.
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