Fed chief strongly hints at July rate cut in House testimony

Fed chief strongly hints at July rate cut in House testimony
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Federal Reserve Chairman Jerome Powell on Wednesday hinted that the central bank will cut interest rates later this month as it confronts economic red flags and mounting political pressure.

In testimony before the House Financial Services Committee, Powell suggested that the Fed may slash borrowing costs in July to protect the U.S. from the continued economic strain of trade battles and a souring global economy. 

“Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy,” Powell said, also noting concern with persistently low inflation. 

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Powell added that U.S. business investment has “slowed notably,” possibly due to concerns about trade tensions and slower growth in the global economy. Housing investment and manufacturing output have also declined this year, reflecting broader domestic issues for the U.S.

Powell’s remarks are the clearest signal yet that the Fed plans to cut interest rates as insurance against a darkening economic outlook, even as the central bank has little room to respond to a major crisis.

Stocks closed with modest gains on Powell's remarks Wednesday as the S&P 500 index briefly landed above 3,000 points for the first time in its history.

The potential rate cut would be welcome news to President TrumpDonald John TrumpRepublicans consider skipping witnesses in Trump impeachment trial Bombshell Afghanistan report bolsters calls for end to 'forever wars' Lawmakers dismiss Chinese retaliatory threat to US tech MORE, who has pushed the Fed to slash borrowing costs since January. But Trump’s pressure also poses political challenges for Powell, who will have to justify a potential cut while convincing the Fed’s critics that it did not cave to the president.

“This President has made it very clear that he has no understanding or respect for the independence of the Federal Reserve,” said Rep. Maxine WatersMaxine Moore WatersCalifornia GOP candidate arrested on stalking charges Maxine Waters earns viral praise for steadfast calls for impeachment as articles announced Democrats could introduce articles of impeachment next week MORE (D-Calif.), chairwoman of the Financial Services panel.

“I urge Chairman Powell and the other Federal Reserve Board governors not to submit to the high-pressure tactics of this President, who continues to push reckless and harmful economic and social policies.”

Trump has bashed his hand-picked Fed chairman for more than a year, ripping the central bank and its leader for raising interest rates four times since Powell was confirmed in 2018.

“We're paying a lot of interest and it's unnecessary, but we don't have a Fed that knows what they're doing,” Trump said Friday. “If we had a Fed that would lower rates, you would have a rocket ship.”

The president has also repeatedly raised questions about Powell’s job security, insisting in several interviews—including with The Hill—that he has the legal power to fire or demote the Fed chief.

Fed experts and legal analysts raise serious doubts about Trump’s authority to fire Powell, which is likely limited to severe neglect or misconduct. Lawmakers in both parties were eager to defend Powell from Trump’s attacks, praising his capability and transparency. 

“I believe you know what you’re doing, sir, and I thank you for it,” said Rep. Denny HeckDennis (Denny) Lynn HeckExclusive: Guccifer 2.0 hacked memos expand on Pennsylvania House races Heck enjoys second political wind Incoming lawmaker feeling a bit overwhelmed MORE (D-Wash.).

Even some of Trump’s most loyal allies lauded Powell while defending the president’s right to condemn the independent central bank.

“Without quibbling about the details, I think that you're doing an outstanding job,” said Rep. Andy BarrAndy Hale BarrOn the Trail: Forget the pundits, more electoral votes could be in play in 2020 Mnuchin to lawmakers: 'I'm highly encouraged you will' pass Trump's North America trade deal Kentucky Democrat moves closer to McConnell challenge MORE (R-Ky.) to Powell, saying he’s been easily accessible to lawmakers. 

“My only point is that criticism from Congress or the President does not, in my view, in any way compromise your independence.”

Powell brushed off concerns about Trump’s influence with his usual refrain: The Fed only considers economic currents, not political factors, when shaping monetary policy to foster stable prices and maximum employment.

“We will always focus on doing the job you've assigned us, and we always do it to the best of our ability and based on objective analysis,” Powell said. “What we're thinking about is the extent to which trade developments and concerns over global growth are weighing on the outlook.”

A volatile and complicated six months for the global economy gives the Fed plenty to consider. 

The U.S. economy has remained solid after a sluggish start to 2019, adding an average of 164,000 jobs each month and maintaining relatively steady growth. Consumer spending has rebounded after a brief dip but drops in business spending and other productivity-boosting areas have raised concerns among economists.

Powell attributed sinking business spending to growing concerns about global trade battles and rising odds of recessions in Europe and China, where industrial output is sinking.

“When businesses become uncertain about the future and about future demand,” Powell explained, “they may decide to wait before they build something or buy something, and they may just hold off.

“There's no perfect way to identify these things,” Powell added. “But we do connect that to trade policy uncertainty, and also uncertainty about global growth and weak manufacturing around the world.”

After the Fed held off on a rate cut at its June meeting, a week of good economic news raised questions about whether the bank would follow through in July with a rate cut. 

The U.S. added 224,000 jobs in June, according to the Labor Department jobs report released Friday. Trump and Chinese President Xi Jinping reached a trade truce and agreed to restart negotiations, prompting all three major U.S. stock indexes to record highs.

But Powell said the labor market was not an area of worry for the Fed, so the sunny jobs report did not impact its forecast. He added that trade anxiety for businesses would persist until Trump’s dispute with China was resolved but declined to prescribe a trade policy for the administration.

Powell also expressed concerns that inflation, now at 1.5 percent, could persist below the Fed’s target range of 2 percent without a cut to borrowing costs. He noted that wages would be rising much faster if the labor market with 3.7 percent unemployment was hot enough to drive prices higher. 

“To call something hot, you need to see some heat, and what we hear are lots of reports of companies having a hard time finding qualified labor, Powell said. 

“Nonetheless, we don't see wages really responding," he added. "So, I don't really see that as the current issue.”

Updated at 4:07 p.m.