Fed chief Jerome Powell testifies on state of USA economy

Fed chief Jerome Powell testifies on state of USA economy

Earlier rounds of United States tariffs on trading partners - including China - had been dismissed as of little macroeconomic importance, with the Fed in early May still anticipating its policy rate would remain unchanged for the rest of the year.

The Fed last cut rates in 2008 at the height of the financial crisis.

President Trump is likely pleased with Powell's testimony on Wednesday as it signaled the Fed would likely be adopting the easing policy he has been calling for for months.

Kicking off in the House of Representatives in front of the House Financial Services Committee today, Fed Chair Powell laid the groundwork for a series of interest rate cuts over the coming months. -China trade war and agreed to resume talks toward a deal that would meet the administration's demands to better protect USA technology.

In an earlier update, we reviewed the different methods that the various major central banks could respond to the growing threat of trade wars.

Rep. Maxine Waters, who leads the committee, declared that "this president has made it clear that he has no understanding or respect for the independence of the Federal Reserve".

The question is whether the Fed will still see a good argument for cutting interest rates after the strong U.S. June jobs data.

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"We had a celebration at the opening", Bruce Bittles, chief investment strategist at Baird, told The Post, adding "There was a pullback because a lot of anticipation is already built into the market". Ahead of the testimony by Fed Chair Powell, Fed funds futures were pricing in a 97.5% chance of a 25-bps rate cut and a 1.5% chance of a 25-bps rate hike in July.

Investors have collectively put the odds of a rate cut this month at 100%.

One wild card in the Fed's decision-making has been Trump's highly unusual public pressure on the central bank to cut rates sharply. But as clearly demonstrated by Powell's testimony Wednesday, the Fed is not joining the #resistance. We can measure whether a rate cut is being priced-in by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future.

Eurodollar contract spreads are quickly shifting back to pricing in two 25-bps rate cuts by December 2019 and a third 25-bps rate cut by June 2020; there are -44-bps discounted through December 2019 and -71-bps discounted through June 2020.

Though the threatened tariffs on Mexico never materialised and China and the U.S. have agreed to resume talks to reach a trade deal, that "did little to alleviate the uncertainty that Fed officials believe is contributing to cooling momentum in global trade and domestic capex plans", Deutsche Bank's U.S. economics team wrote this week.

It's worth repeating an observation from three weeks ago. The board increased interest rates four times in 2018 but hasn't touched them so far this year.

The Fed chair said overall growth has also "moderated", and cited the possibility that "weak inflation will be even more persistent than we now anticipate". The Dow traded lower for three straight sessions on fears that the apparently-healthy USA economy would embolden the Fed to retain its current neutral posture rather than dive headlong into dovish territory. While the DXY Index has traded in a downward sloping channel since the start of May, the downtrend appeared to show signs of breaking this week.