Federal Reserve Chairman Jerome Powell holds a press conference following a two day Federal Open Market Committee policy meeting in Washington, January 30, 2019.
Leah Millis | Reuters
Fed Chairman Jerome Powell, in prepared remarks for Congress, reaffirmed that the Federal Reserve is concerned about economic weakness and that it will act as “appropriate” to sustain the recovery — a signal to markets that a rate cut is coming soon.
Powell said overall growth seems to have moderated in the second quarter, and in recent weeks the outlook has not improved. “Crosscurrents have reemerged,” he said in his testimony, noting that investments slowed down “notably” from trade tensions and a global slowdown.
“Bottom line, Jay Powell fully endorsed the July rate cut and did absolutely nothing to pull the markets back from that expectation. There was little in the statement to imply what this means past the July meeting but we can infer that any further softening in the data past July will likely mean more action from the Fed at subsequent meetings,” noted Peter Boockvar, chief investment officer at Bleakley Advisory Group.
The Fed chairman’s statement was released ahead of his appearance before the House Financial Services Committee at 10 a.m. ET Wednesday and the Senate Banking Committee on Thursday.
“He’s explaining why he thinks it’s appropriate to cut rates. I think really the question for markets is — is it 25 or 50 (basis points). This has pushed us closer to 50. I think 50 would be more effective,” said Ralph Axel, senior U.S. rate strategist at Bank of America Merrill Lynch.
The fed funds futures market has been pricing in a 25 basis point, or quarter-percentage point cut to the fed funds target rate range, now at 2.25 to 2.50%. Axel said the market began to price a 58% chance of a 50 basis point cut, after Powell’s prepared comments were released at 8:30 a.m. ET. The market is pricing in 68 basis points of easing by the end of the year.
Stocks jumped, and Treasury yields fell after Powell’s comments, reflecting an outlook for lower interest rates. The S&P 500 rallied into record territory, rising above 3,000 for the first time. The yield on the benchmark 10-year Treasury fell to 2.05%.
Powell also repeated that the Fed would act as “appropriate” to keep the recovery going, and he also noted that weak inflation could be “more persistent.” Just several months ago, the Fed chairman sounded a more hawkish tone when he said weak inflation was likely “transitory.”
“This is one of the most dovish speeches I’ve ever read. Here we are presumably running above potential output, with the unemployment rate falling and he’s looking to ease in a big way. It has a lot of people scratching their head, and in the first paragraph he says I’m not bowing to Donald Trump,” said Axel.
President Donald Trump has repeatedly complained about Fed policy and Powell for not easing monetary policy by cutting interest rates. In his opening remarks, Powell, who has stressed the Fed’s independence, spoke to the concern about political meddling by acknowledging that Congress gave the Fed “an important degree of independence” so that it can pursue its statutory goals “based on objective analysis and data.”
Powell later told the House Financial Services Committee that he would not resign if asked to do so by the president, and that he intends to serve his full four-year term.
Boockvar noted that after the June meeting, Powell had said some Fed members were leaning toward a rate cut. “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. Inflation pressures remain muted,” Powell said.
Strategists said Powell was reaffirming the dovishness of the Fed’s comments, following the June meeting. Friday’s surprisingly strong June jobs report, with 224,000 payrolls added, raised doubts about the need for a rate reduction.
“If this had come out last Wednesday, I don’t think it would sound dovish, but given the change in the markets since then, it’s dovish.” said John Briggs, head of strategy at NatWest Markets. “He’s basically defending the June meeting.”
Powell, during his testimony, said the strong jobs report did not change the Fed’s view of whether it should cut interest rates. He said he would not describe the jobs market as hot, when asked about it. “To call something hot, you need to see some heat,” the Fed chief said
Powell also said the resumption of talks between the U.S. and China was constructive.
“It doesn’t remove the uncertainty that we see as overall weighing on the outlook. The bottom line is the uncertainties around global growth and trade continue to weigh on the outlook and inflation continues to be muted, and those things are still in place,” he told the committee.
Axel said Powell also included a number of concerns that a Fed chair normally may not have included. “He mentions the debt ceiling .That is amazing. That’s not normally a big economic issue, and Brexit,” he said, adding the inflation reference was also very dovish.
“It’s everything you could possibly be dovish about. He went full-on dovish,” said Axel.