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Fed chief Jerome Powell hints at likely interest rate cut in end July
FEDERAL Reserve chair Jerome Powell had two messages for Congress on Wednesday: Central bank independence is critical and an interest-rate cut is likely at the end of July.
President Donald Trump has repeatedly bashed the Fed, blaming Mr Powell and his team for harming the economy by keeping interest rates too high and threatening to try to remove Mr Powell as chair if the situation doesn't change.
Mr Powell hinted strongly on Wednesday that a cut is likely to happen this month because Mr Trump's trade war and slowing growth abroad are starting to bite. "Since (June) . . . it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook. Inflation pressures remain muted," Mr Powell said on Wednesday in his opening remarks to the House Financial Services Committee before taking questions from members of the Committee at 1400 GMT.
S&P 500 hit 3,000 for the first time as Fed signalled possible rate cut. Wall Street is pricing in a near 100 per cent probability of a reduction in interest rates at the Fed's July 31 meeting.
The US economy is doing "reasonably well," Mr 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, African Americans and people in rural communities continuing to have a harder time finding jobs that pay well.
Mr Powell carefully explained the reasons why the policy committee has shifted its views this year, and noted that "crosscurrents have reemerged, creating greater uncertainty." Despite a current trade war truce with China, Mr Powell continued to stress downside risks to the outlook. "Uncertainties about the outlook have increased in recent months," Mr Powell said in the text of his remarks.
"Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the US economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit." He noted that policy makers are carefully monitoring developments including the risk that weak readings on inflation could be "even more persistent than we currently anticipate".
Mr Trump is making the strong economy a centrepiece of his reelection 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, Mr Trump said last week that he plans to nominate conservative scholar Judy Shelton and economist Christopher Waller to fill the final two seats on the Fed board. Mr Shelton and Mr Waller both support lowering rates.
Mr Powell has stressed that the Fed will do what is best for the economy and does not take political considerations into account. "Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on objective analysis and data," Mr Powell said on Wednesday. "We appreciate that our independence brings with it an obligation for transparency so that you and the public can hold us accountable."
The benchmark interest rate is currently 2.35 per cent, the highest rate in over a decade but a low level by historical standards. The Fed is widely expected to lower the rate to about 2.1 per cent by the end of the month, which should provide extra stimulus to the economy, an unusual move at a time when unemployment is at a half-century low. WP, BLOOMBERG