Fed chief heads to Congress with interest-rate cut in play

Bloomberg

Jerome Powell is likely to leave Federal Reserve interest-rate cuts firmly on the table when he appears before Congress this week, even though the latest US jobs report dialed down the urgency to ease borrowing costs.
The Fed chairman, who has been hectored for months by President Donald Trump for not cutting rates, will probably repeat language from the Federal Open Market Committee’s June statement that it will “act as appropriate’’ to sustain the economic expansion — reinforcing bets the central bank will cut at its July 30-31 meeting.
Powell was expected to give his semiannual monetary policy testimony on Wednesday before the House Financial Services committee and a day later to the Senate banking panel.
Lawmakers including Democratic presidential candidate Elizabeth Warren are expected to question him about a range of issues such as Trump’s attacks, the state of the economy and Facebook Inc’s new currency plans.
“He’s going to have to send a clear signal this week: go, no go, or still unsure and watching the data,” said Stephen Stanley, chief economist with Amherst Pierpont Securities.
“If he continues to be ambiguous, the markets probably will assume that he approves of market pricing, so he might as well take a position.’’
Investors are fully pricing in a 25 basis point move.
Powell’s updated assessment of risks to the US outlook will be especially important, since rising concerns would be the rationale for rate cuts.
The Fed’s monetary policy report highlighted a significant weakening in global trade growth and manufacturing since 2017.
Uncertainly has weighed on business investment and tariffs have had a “material but modest” direct impact on global trade flows, according to the study.
“Powell has made it clear that, if necessary, the Fed will take steps to assure the continuation of the expansion,’’ said Ward McCarthy, chief financial economist at Jefferies.
“What is not clear is what would trigger the Fed take these steps. I am looking for him to provide some clarity.’’
The addition of 224,000 jobs in June, far more than economists expected, would tend to suggest there’s less urgency to offset a global economic slowing.
The Labor Department report showed no wage pressures, with average hourly earnings steady at 3.1 percent, and an expansion of the labor force signals there may still some slack in the job market.
The stock market has hit new highs as concerns over the US trade battle with China have eased in recent weeks. But at the same time, growth slowed in the second quarter, and is tracking about a 1.3 percent annual rate, according to the Atlanta Fed’s tracker.
“He will affirm the economy remains solid, if not spectacular,’’ said Diane Swonk, chief economist at Grant Thornton.
“What matters most is what he sees as headwinds and how he characterises those risks. They are driving the desire to do an insurance cut.’’
Powell is likely to be asked to respond to repeated criticism from Trump and pressed to discuss his conversations with the president. “We don’t have a Fed that knows what they’re doing,’’ Trump said.
The president has said he has the right to fire or demote Powell, while the Fed chief has said he intends to serve his full four-year term as chairman and “the law is clear” on that issue.