Fed's Powell Signals Rate Cut as Trade War Outweighs Strong Job Market

Federal Reserve Board Chairman Jerome Powell (Photo: Bloomberg)

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 U.S., 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 U.S. stocks advanced toward all-time highs.

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.