As Fed chief Jerome Powell speaks, investors will search for rate cut clues
Washington –– Every sentence Federal Reserve Chairman Jerome Powell speaks to Congress this week is sure to be parsed by investors who expect — and hope — the Fed will cut interest rates later this month for the first time in a decade. In written testimony released before today’s hearing before the House Financial Services Committee, Powell hints strongly at a cut, saying: “Since our May meeting, however, [growth and trade] crosscurrents have reemerged, creating greater uncertainty.”
“Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy,” he said.
Powell is scheduled to testify for two days starting Wednesday at a time when the economic landscape is a mixed one: The U.S. job market appears resilient. Consumer spending and home sales look solid. But the economy is likely slowing. President Donald Trump’s trade wars have magnified uncertainties. And inflation remains chronically below the Fed’s target level.
Powell and the Fed have made clear they’ll do whatever they deem “appropriate” to sustain the economic expansion — a message traders have interpreted to mean a coming rate cut. Indeed, when the Fed’s policymaker met last month, they removed from their statement a reference to being “patient” about interest rates. Some Fed watchers have suggested that cutting rates now would serve as a kind of insurance policy by the central bank against a potential economic downturn.
Powell will testify Wednesday to the House Financial Services Committee and on Thursday to the Senate Banking Committee as part of the Fed’s semi-annual monetary report to Congress.
Expecting a rate cut
Investors, as tracked by the CME Group, have assigned a 100% likelihood to a rate cut when the Fed meets in three weeks. Until very recently, the chance of a modest quarter-point cut was put at 70% and a steep half-point cut at 30%. The Fed’s key rate, which influences many consumer and business loans, now stands in a range of 2.25% to 2.5%. Investors still see a 100% likelihood of a rate cut this month. But nearly all now foresee only a quarter-point move.
That change reflects two developments. Mr. Trump and Chinese President Xi Jinping declared a truce last month in what had threatened to become an escalating U.S.-China trade war and agreed to resume talks toward a deal that would meet the administration’s demands to better protect U.S. technology.
That step eased fears that Mr. Trump would extend punitive tariffs to an additional $300 billion in Chinese goods, in the process inviting retaliation from Beijing on American exports and likely weakening both nations’ economies. And last week, the government reported that after a tepid job gain in May, U.S. employers sharply stepped up their hiring in June, an indication of the economy’s durability.
However, as Powell notes in his written testimony, “crosscurrents” concerning trade policies and global growth have “reemerged.” He adds: “Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy.”
Sending a signal?
Powell is certain to be questioned by lawmakers about these and other developments, and about his view of the overall economy. No one expects him to state directly whether the Fed is ready to cut rates. But he may be choosing to send some such signal nevertheless.
One wild card in the Fed’s decision-making has been Mr. Trump’s highly unusual public pressure on the central bank to cut rates sharply. The president has repeatedly accused Powell and the Fed of keeping credit too tight for too long and of thereby holding back the economy and the stock market. Mr. Trump’s attacks have raised alarms that he’s undermining the Fed’s long-recognized independence from political pressure.
Powell’s written remarks to Congress seem to tackle that point fairly directly. “Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on objective analysis and data.”
Some economists have suggested that if the Fed surprises the markets late this month by choosing not to cut rates, it might be because Powell and other Fed policymakers don’t want to be seen as having caved to Trump’s relentless pressure. On Sunday, Mr. Trump asserted that if the Fed “knew what it was doing,” it would cut rates. That accusation followed his contention Friday that the central bank “doesn’t have a clue” and is “our most difficult problem.”
“No effort to remove him”
Mr. Trump has insisted that he has the authority to either fire Powell or demote him from the chairman’s job — something most outside experts dispute. On Tuesday, Lawrence Kudlow, head of the president’s National Economic Council, said on CNBC that “there is no effort to remove him.”
Kudlow added: “I will say that unequivocally at the present time. Yes, he’s safe.”
Asked Tuesday about Powell’s status, White House counselor Kellyanne Conway told reporters Mr. Trump has made clear his unhappiness with the Fed’s rate policies and believes “he has the power to fire Jay Powell, but he hasn’t done that. He’s not doing that.”
For insight into Mr. Trump’s thinking about the Fed, Conway urged reporters to focus on the president’s announcement last week of his two latest candidates for seats on the seven-member Fed board: Judy Shelton, an outspoken conservative economist, and Christopher Waller, research director at the Fed’s St. Louis regional bank. Both are regarded as highly likely to support Mr. Trump’s drive to lower rates.
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