Fed saw elevated risks in October while opting to go on hold

Federal Reserve officials stressed that risks to the U.S. economy remained elevated as they agreed to put interest rates on hold following their third cut this year.

Many participants saw downside risks to the economic outlook as elevated, "further underscoring the case for a rate cut at this meeting,'' according to minutes of the Oct. 29-30 Federal Open Market Committee session released Wednesday in Washington.

"In particular, risks to the outlook associated with global economic growth and international trade were still seen as significant,'' the minutes said. "The risk that a global growth slowdown would further weigh on the domestic economy remained prominent."

The FOMC lowered rates by a quarter percentage point at its October gathering, the third such move in three months. At his press conference following the announcement, Chairman Jerome Powell said monetary policy was "in a good place,'' signaling rates would stay on hold until officials saw a "material'' change in their economic outlook.

The 10-year benchmark yield held steady around 1.74% following the release of the minutes, while the dollar was little changed. Traders added slightly to their positioning for a rate cut next year, with futures markets now fully priced for a quarter-point move by early in the third quarter.

The minutes showed "most participants" judged policy would be well calibrated after the Oct. 30 cut and "likely would remain so as long as incoming information about the economy did not result in a material reassessment of the economic outlook."

"Some" officials, however, had preferred to leave rates steady at the meeting because their forecasts for the economy remained favorable. A "few" also said cutting rates would raise financial stability risks.

At the gathering, a couple of participants said the committee should reinforce its statement with additional communications indicating that another rate reduction "was unlikely in the near term unless incoming information was consistent with a significant slowdown in the pace of economic activity," the minutes showed.

Kansas City Fed President Esther George and Boston's Eric Rosengren voted against the rate cut, as they had in July and September, preferring to keep rates steady. In addition, the minutes showed a couple of participants who backed a cut said the decision was "a close call."

The committee also wrestled with the option of introducing a permanent program aimed at providing liquidity to overnight funding markets, a so-called standing repo facility, though did not make a decision.

"A standing fixed-rate repo facility would likely provide substantial assurance of control over the federal funds rate, but use of the facility could become stigmatized, particularly if the rate was set at a relatively high level," the minutes said. "Conversely, a standing facility with a rate set at a relatively low level could result in larger and more frequent repo operations than would be appropriate."

The minutes also said that by effectively offering as-needed liquidity, "such a facility could increase the risk that some institutions may take on an undesirably high amount of liquidity risk."

Officials also considered "modestly sized, relatively frequent repo operations designed to provide a high degree of readiness should the need for larger operations arise."

A sudden shortage of liquidity in mid-September caused overnight repurchase rates to spike and briefly pushed the benchmark federal funds rate out of the Fed's target range. The central bank responded by injecting cash into the repo market to relieve strains and purchasing Treasury bills at an initial pace of $60 billion a month to ensure ample reserves.

Fed policymakers reiterated at the last meeting that they would keep up Treasury bill purchases into the second quarter. The minutes showed that all participants supported the plan.

The minutes also contained an account of an Oct. 4 videoconference on money markets, which was announced on Oct. 11. Most participants preferred not to wait until the Oct. 29-30 meeting to make a statement on the planned bill purchases and repo operations, the minutes said.

Fed governors, based in Washington, and the New York reserve bank president have permanent votes on the FOMC. The other 11 regional chiefs share the remaining four votes on a rotating basis.