WASHINGTON -- Pointing to a weaker global economy, rising trade tensions and chronically low inflation, Federal Reserve Chairman Jerome Powell signaled Wednesday that the Fed will likely cut interest rates late this month for the first time in a decade.
Delivering the central bank's semiannual report to Congress, Powell said that since Fed officials met last month, "uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook." In addition, inflation has dipped further below the Fed's annual target level.
The chairman's remarks led investors to send stock prices up, bond yields down and the value of the U.S. dollar lower on expectations of lower interest rates. The S&P 500 index briefly traded over 3,000 for the first time.
Testifying to the House Financial Services Committee, Powell was asked, as he has been before, what he would do if President Donald Trump tried to fire or demote him. Powell offered the same terse reply he's given in the past when asked about Trump's attacks on his leadership and the president's insistence that he has authority to remove the chairman: Powell said he intends to serve out his full four-year term, which ends in early 2022.
The president has repeatedly accused Powell and the Fed of keeping credit too tight for too long and of thereby holding back the economy and the stock market. Most experts dispute Trump's assertion that he has authority to either fire Powell or demote him from the chairman's post, and his attacks have raised alarms that he's undermining the Fed's long-recognized independence from political pressure.
Powell's description Wednesday of a more downbeat economic landscape led most economists to conclude that a quarter-point rate cut is a virtual certainty at the Fed's meeting in three weeks, with many forecasting further rate cuts to come. Some characterized a likely rate cut late this month as an "insurance policy" against an economic downturn.
"I think it will be the start of a series of rate cuts," added Sung Won Sohn, economics professor at Loyola Marymount University in Los Angeles. "Powell wants to provide fuel for the economy down the road."
Falling interest rates lift stocks in two ways. They lower the returns on new investments in bonds, the main alternative to stocks for many investors. That makes stocks look more attractive to investors. A rate cut also makes it cheaper for consumers and companies to borrow, and that can buck up economic activity and help corporate profits.
Expectations of a pending rate cut drew additional support Wednesday when the Fed released the minutes of its June 18-19 meeting. The central bank held rates unchanged then, but the minutes showed that some officials felt that looser credit could soon be needed to address economic weakness.
Not all Fed officials were on board with a near-term rate cut. "Several" policymakers indicated that while risks had increased, they would want to see a further deterioration in the outlook before supporting easier policy, the minutes said.
The Fed's benchmark rate stands in a range of 2.25% to 2.5% after it raised rates four times last year -- action that incited the initial attacks on the Powell from Trump.
The Fed hasn't cut rates since 2008 at the height of the financial crisis.
In the prepared remarks he delivered Wednesday before taking questions from the House members, Powell made no mention of the president's criticism. He did thank Congress for the "independence" it has given the Fed to operate free of political intrusion. But later, in the question-and-answer period, several Democratic committee members offered support for Powell's leadership and a rejection of Trump's criticism.
Powell's remarks Wednesday began two days of his testimony on Capitol Hill. Today, he will address the Senate Banking Committee.
At the moment, the U.S. economic landscape is a mixed one: The job market appears resilient, but economic growth is slowing. Many forecasters predict that growth has slowed to an annual rate of around 2% in the just completed April-June quarter.
When unemployment has been this low in the past, inflation has typically risen, forcing the Fed to raise interest rates to keep inflation from spiking. But since the latest recession, inflation has remained below the Fed's target. Powell told Congress that he thinks the labor market isn't as "hot" as it could be, and there is still more room for wages to rise and Americans to get jobs without triggering inflation.
"We don't have any evidence for calling this a hot labor market. To call something hot, you need to see some heat," Powell said.
In his testimony, Powell said the economy has fared reasonably well over the first half of the year. But he noted that "crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook."
The U.S. economy is doing "reasonably well," Powell said, but he noted that business investment has "slowed notably," likely because of the uncertainty around trade and global growth. He also stressed that the economic gains have not been shared evenly by everyone. Hispanics, blacks and people in rural communities continue to have a harder time finding jobs that pay well.
Trump is making the strong economy a centerpiece of his re-election campaign, and he wants the Fed to help boost growth ahead of the 2020 election. In his latest effort to bend the Fed to his will, Trump last week said he plans to nominate conservative scholar Judy Shelton and economist Christopher Waller to fill the final two seats on the Fed board. Shelton and Waller both support lowering rates.
Trump and Chinese President Xi Jinping declared a truce last month in what had threatened to become an escalating U.S.-China trade war and agreed to resume talks toward a deal that would meet the administration's demands to better protect U.S. technology. That step eased fears that Trump would extend punitive tariffs to an additional $300 billion in Chinese goods, in the process inviting retaliation from Beijing on American exports and likely weakening both nations' economies.
And last week the government reported that after a tepid job gain in May, U.S. employers sharply stepped up their hiring in June, an indication of the economy's durability.
Information for this article was contributed by Martin Crutsinger of The Associated Press; by Heather Long of The Washington Post; by Christopher Condon of Bloomberg News; and by Jeanna Smialek and Matt Phillips of The New York Times.
A Section on 07/11/2019