Federal Reserve Chairman Jerome Powell plans to signal to Congress Wednesday that the central bank is prepared to cut interest rates as soon as this month despite an improved employment picture and less incendiary trade battle with China.
In prepared testimony he’s set to deliver before the House Financial Services Committee at 10 a.m., Powell notes that in June Fed policymakers believed the case for lower rates had strengthened amid the trade tensions, a slowing global economy and muted inflation.
“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. economic outlook,” Powell said in the prepared text.
The testimony appears to signal that the Fed is poised to act despite a somewhat more stable economic landscape.
Last week, for example, the Labor Department reported 224,000 job gains in June, up from a disappointing 72,000 the prior month. And President Trump’s summit with Chinese President Xi Jinping at the G-20 meetings yielded a truce that has Trump deferring a 25% tariff on the remaining $300 billion in Chinese imports not already hit with duties as the two countries continue talks.
Yet the broader standoff between the U.S. and China is unresolved. And other risks to growth still loom, Powell noted, including a slowing global economy and muted inflation that’s below the Fed’s 2% annual target. As a result, fed fund futures markets are still pricing in a quarter point rate cut at the Fed’s late July meeting, though that’s down from expectations for up to a half-point cut before the summit and June jobs report.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, expects Powell to more explicitly signal that the Fed is ready plans for a rate decrease this month when he responds to questions from committee members.
Powell’s testimony largely echoes his remarks and the Fed’s policy statement after a meeting last month. The central bank left rates unchanged but indicated it was poised to cut them as soon as a July 30-31 meeting amid the growing risks.
Economists view a likely rate decrease as an “insurance cut” because it would be aimed at heading off a potential downturn in the economy that’s not yet evident. Policymakers are inclined to act early because a decade after the Great Recession ended, the Fed’s key interest rate is still relatively low at a range of 2.25% to 2.5%. That gives the Fed little room to lower rates to spur growth in case of recession.
“Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the (Fed’s) 2% objective,” Powell said in the prepared testimony.
He added, “However, uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of policy issues have yet to be resolved, including trade developments, the federal debt ceiling and Brexit. And there is a risk weak inflation will be even more persistent than we currently anticipate.