(July 11): The Federal Reserve is preparing to cut interest rates for the first time in a decade because it sees a cooling global economy and no sign of overheating in the jobs market at home.
Since the Fed opened the door to lower borrowing costs last month, plenty more data has arrived to back up the view that “manufacturing, trade and investment are weak all around the world,” Chairman Jerome Powell told Congress at a hearing on Wednesday.
He said June’s jobs report, which showed stronger-than-expected hiring in the US, was “great news” -- but not enough to tilt the balance, because wages aren’t rising fast enough to trigger much inflation. In fact, Powell made it clear that inflation is still too low.
Markets saw his comments as confirmation that rates are headed lower at the Fed’s next meeting on July 30-31. Traders stepped up bets that the reduction will be by half a percentage point, though the consensus still foresees a quarter-point cut. Powell didn’t respond directly when asked about the possibility of a 50 basis-point cut.
Treasuries climbed with gold after he spoke, while US stocks advanced toward all-time highs.
Fed officials had mounting risks firmly in view when they met three weeks ago, according to minutes of their June 18-19 gathering published later on Wednesday that showed many saw additional policy easing warranted in the “near term.”
Powell’s semi-annual testimony to lawmakers at a House Financial Services Committee in Washington lasted about three hours, and the Fed chief is due back on Thursday when he’ll appear before the Senate Banking Committee.
Lawmakers kept asking about Facebook Inc.’s proposed digital currency, and Powell said it raises “serious concerns” and will need intense scrutiny. He also fielded questions about the threat to his job from President Donald Trump.
Trump has attacked the Fed for keeping rates too high, breaking with the recent convention of presidents not intervening in monetary policy. He has also explored ways he could replace Powell.
With several lawmakers voicing support for Fed independence, Powell was asked how he’d respond if Trump tried to fire him.
“My answer would be no,” Powell said. “The law clearly gives me a four year term and I intend to serve it."
Weak All Over
Trade tensions are weighing on business investment and there are other reasons to worry about the global economy, Powell said.
“Momentum appears to have slowed in some major foreign economies,” he said, and the weakness could spread to impact a US economy that’s currently on a “solid footing.”
What Our Economists Say
Powell chose not to reshape market expectations, which were leaning heavily toward a July cut of 25 bps, further illustrating that the Fed is not willing to fight market sentiment following the clumsy execution of its final rate hike in the fourth quarter of last year.
-- Carl Riccadonna, Yelena Shulyatyeva and Eliza Winger (Bloomberg Economics)
He said that while the US labour market remains strong, it’s delivering gains -- especially, right now, to people lower down the income ladder -- without creating a risk of inflation.
Where’s the Heat?
“To call something hot, you need to see some heat,” Powell said. “We haven’t seen wages moving up as sharply as they have in the past.”
One of the hottest topics at the hearing was Libra, Facebook’s proposed digital currency.
Maxine Waters, the chairwoman of the House committee, said the social-media giant may be seeking to “establish a parallel banking and monetary policy system to rival the dollar” -- and she wanted to know what Powell planned to do about it.
The Fed chair said Facebook’s proposal raises “serious concerns regarding privacy, money laundering, consumer protection and financial stability” that will need to be “thoroughly and publicly addressed” before Libra can be allowed to go ahead.
He said the Fed doesn’t want to discourage financial innovation. “We just want it to take place in a safe and sound way.”
