Fed Chair Powell Testimony In Focus as Global Growth Slows, Trump Pressure Accelerates
Washington (July 10) Federal Reserve Chairman Jerome Powell faces questions from U.S. lawmakers Wednesday, but his remarks on the fate of domestic interest rates, and the underlying strength of the American economy, will be keenly watched by investors around the world.
Powell's Monetary Policy Report to the Congress, formerly known as Humphrey-Hawkins testimony after the lawmakers that mandated the semi-annual appearances back in the 1970s, will likely focus on both the near-term strength of the U.S. economy, which reached a milestone this month with its tenth year of expansion -- the longest on record -- as well as the persistent and pointed criticism Powell and his colleagues have faced from the White House. Powell's statement, followed by a question-and-answer session with the House Financial Services committee, kicks off at 10:00 am Eastern time.
President Donald Trump said earlier this week that the Fed "doesn't have a clue" and is "out most difficult problem", adding that U.S. stocks, which touched record levels last week, would be even higher had Powell not directed a rate hike, which took the Fed Funds target to between 2.25% and 2.5%, in December of last year.
Apart from the unprecedented nature of the attacks, as well as references from Trump himself that he could fire or demote Powell if he wish, the President's criticism of the December hike is shared by many analysts and investors around the world, and markets have been attempting to pressure the Fed into retreating from its "patient" stance on policy and deliver numerous rate reductions between now and the end of the year.
They could be disappointed.
"We'd be surprised to see any serious shift in the tone of Fed Chair Powell's semi-annual Monetary Policy Testimony today compared to the FOMC statement and press conference just three weeks ago," said Ian Shepherson of Pantheon Macroeconomics, noting Powell dropped the word "patient" from the text and the Fed would "act as appropriate to sustain the expansion".
"That said, Mr. Powell will have to acknowledge the rebound in June payrolls, which effectively removed market hopes for a 50 basis point easing on July 31 at a stroke, but we fully expect
him to repeat the "appropriate" line," Shepherdson added.
The June payroll report, which showed U.S. employers added a much-larger-than-expected 224,000 jobs into the economy, as well as the resumption of trade talks between Washington and Beijing following Trump's G20 Summit meeting with President Xi Jingping in Osaka, have rekindled bets on near-term growth and eased hopes of a deeper Fed rate cut.
In fact, benchmark 10-year U.S. Treasury note yields, which hit a November 2016 low of 1.945% last week, have backed all the way up to a three-week high of 2.108% in early Wednesday trading as investors re-price bond markets around the world now that the chances of a 50 basis point rate cut have all but disappeared.
That said, JPMorgan analyst Bruce Kasman argues that the case for an "insurance" cut in the Fed Funds rate, which markets are expecting to be 25 basis points, is justified by both the slowing global growth momentum and deteriorating business confidence.
He just isn't sure that it will come later this month.
"The Fed will also be sensitive to the fact that an important cushion to this drag comes from
supportive financial conditions that are directly linked to the Fed's guidance on easing. However, the latest more positive developments suggest further easing is not assured and will
depend on incoming news," Kasman said. "Our forecast for an additional 25 basis point ease in September is based on a forecast that US GDP expands at 1.5% this quarter and private sector job gains moderate toward a 100,000 monthly pace."
Reuters
