WASHINGTON (AP) — 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.
Powell began testifying for two days starting yesterday at a time when the economic landscape is a mixed one: The United States (US) 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 recently made clear they will do whatever they deem “appropriate” to sustain the economic expansion — a message that traders have interpreted to mean a coming rate cut. Indeed, when they met last month, the Fed’s policymakers 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 testified yesterday to the House Financial Services Committee. He will also testify to the Senate Banking Committee as part of the Fed’s semi-annual monetary report to Congress today.
Investors, as tracked by the CME Group, have assigned a 100 per cent 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 per cent and a steep half-point cut at 30 per cent. The Fed’s key rate, which influences many consumer and business loans, now stands in a range of 2.25 per cent to 2.5 per cent. Investors still see a 100 per cent likelihood of a rate cut this month. But nearly all now foresee only a quarter-point move.
That change reflects two developments. Trump and Chinese President Xi Jinping declared a truce last month in what had threatened to become an escalating US-China trade war and agreed to resume talks toward a deal that would meet the administration’s demands to better protect US technology.
That step eased fears that Trump would extend punitive tariffs to an additional USD300 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, US employers sharply stepped up their hiring in June, an indication of the economy’s durability.
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 choose to send some such signal nevertheless.
One wild card in the Fed’s decision-making has been 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. Trump’s attacks have raised alarms that he is undermining the Fed’s long-recognised independence from political pressure.
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.
Last Sunday, Trump asserted that if the Fed “knew what it was doing”, it would cut rates. That accusation followed his contention last Friday that the central bank “doesn’t have a clue” and is “our most difficult problem”.
Trump has insisted that he has the authority to either fire Powell or demote him from the chairman’s job — something that 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 on Tuesday about Powell’s status, White House counsellor Kellyanne Conway told reporters that 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”.