Concerns about trade policy and a weak global economy “continue to weigh on the U.S. economic outlook” and the Federal Reserve stands ready to “act as appropriate” to sustain a decade-long expansion, Fed Chairman Jerome Powell said on Wednesday in remarks that could bolster expectations of an interest rate cut later this month.
In prepared remarks to a congressional committee, Powell contrasted the Fed’s “baseline outlook” of continued U.S. growth against a considerable set of risks – including persistently weak inflation, slower growth in other major economies, and a downturn in business investment driven by uncertainty over just how long the Trump administration’s trade war with China and other countries will last and how intense it will become.
Fed officials at their June policy meeting signaled those concerns might warrant lower rates, and “since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. outlook,” Powell said.
“Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture reported heightened concerns over trade developments,” Powell said, noting that business investment, an important component of economic growth, “seems to have slowed notably” in recent months.
Overall growth has also “moderated,” the Fed chief said, while “there is a risk that weak inflation will be even more persistent than we currently anticipate,” and not prove as transitory as Fed officials have often insisted.
Instant view: Powell – Fed stands ready to act “as appropriate” to sustain expansion
“Powell is setting it up, certainly for a July rate cut,” said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago. “To me, it all depends on where you look in the economy. But over the last decade, the Federal Reserve has been banging the inflation beehive with a baseball bat and the bees haven’t come out, so they figure keep trying this until something happens.”
U.S. stock index futures gained, turning positive for the day after Powell’s remarks were released, while the U.S. dollar fell against a basket of other currencies. ESc1 .DXY Government bond yields dipped, with two-year Treasuries US2YT=RR falling below 1.87%, from around 1.93% earlier Wednesday morning. Meanwhile, interest rate futures appeared to price in greater odds of an aggressive, 50 basis point, rate cut this month.
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