Many Fed officials saw stronger case for rate cut last month

Andrew Cummings
July 11, 2019

"Powell's comments on trade war adding uncertainties in the U.S. economy left doors open for a rate cut, giving investors an opportunity to buy gold when it was seeking a support", said Michael Matousek, head trader at U.S. Global Investors.

The Fed's benchmark interest rate now stands in a range of 2.25% to 2.5% and the central bank has not cut rates since the Great Recession in 2008. USA equity markets got off to a bullish start to the day as the S&P 500 Index moved to make an all-time high after hitting the 3,000 mark - a remarkable level that traders have been optimistically eyeing over the past months.

At that June 18-19 meeting, some Fed policymakers anxious that they may need act to lift inflation that is failing to meet the USA central bank's 2 per cent annual target and to combat a pervasive pessimism among corporations that they see holding back business investment.

Paul Ashworth, chief USA economist at Capital Economics, said he thinks economic growth will slow below a 1 percent annual rate in the second half of this year, which he thinks will lead to additional quarter-point cuts in December and then March.

In his testimony, the first instalment of two days on Capitol Hill this week, Powell also downplayed a strong June jobs report and dismissed claims that the USA labour market is hot.

Investors have been mostly pausing ahead of the two days of congressional testimony from Federal Reserve Chair Jerome Powell.

"If we had a Fed that would lower interest rates, we would be like a rocket ship", he said.

Shares of Levi Strauss tumbled around 12 percent, after the USA apparel giant reported a slump in its second-quarter profit, as dragged down by "a stronger dollar, higher marketing costs, and investments in its online business".

Mr Powell, giving evidence to a hearing in Washington, has come under pressure from Donald Trump to cut rates.

Markets were already counting on the Federal Reserve to further enable Trump's trade policies by cutting rates at the end of July.

And "a few" officials said that cutting rates just to push inflation a few tenths of a percentage point back to its target would also risk inflating bubbles in financial markets.

Powell also said that while US unemployment remains low at 3.7%, wage growth is not indicating an overheated jobs market and inflation "continues to be muted".

"Manufacturing, trade and investment are weak all around the world".

"Of course, I would not do that", Powell responded, before Waters asked him to repeat himself. "The law clearly gives me a four-year term and I fully intend to serve it".

Trump's May 30 comments on Twitter threatening to impose tariffs on Mexico unless the country met his demands for tougher controls on immigrants crossing its northern border also helped spook markets and spark a shift in the Fed's thinking. Two-year rates slumped while longer-dated bond yields rose. A cut could lift home and auto sales by lowering the borrowing costs for major purchases.

Powell will testify again today before the Senate Banking Committee.

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