Door open to US rate cut as Fed's Powell flags economic uncertainties

Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Capitol Hill in Washington, DC. Powell is testifying on monetary policy and the state of the economy. (Zach Gibson/Getty Images/AFP)

Powell also was defiant in the face of a constant stream of criticism from President Donald Trump, saying the Fed pays no attention to commentary and saying he would not step down should Trump try to fire him.

In remarks welcomed by Wall Street, Powell said many central bankers believed the case for lower rates "had strengthened" last month given the rising "crosscurrents" in the economy.

In his highly-anticipated testimony to Congress, he repeatedly stressed the importance of keeping the US economy growing to ensure its benefits reach Americans left at the margins and said the central bank will deploy all its tools to support continued expansion.

Investors took this as a clear signal the Fed will cut its the benchmark lending rate at the next policy meeting Jul 30-31.

Early in the trading session, the broad-based S&P 500 stock index on Wednesday hit 3,000 for the first time before paring gains somewhat, while the Nasdaq, the home of major tech companies, finished at a record.

For the moment, a rate cut also should satisfy Trump, who has been putting intense pressure on the Fed to cut the benchmark interest rate and boost the economy, repeatedly criticising Powell on Twitter and in public comments.

Having raised the key borrowing rate nine times since 2015 as the economy expanded, most recently in December, the Fed last month opened the door to a rate cut amid signs of slowing.

Powell repeated that sentiment in his prepared statement to the House Financial Services Committee, saying the central bank "would act as appropriate to sustain the expansion."

And he said that in the weeks since the June policy meeting "it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook."

At the same time, price measures watched closely by the Fed continue to run well below its two percent target, while wage gains so far are barely enough to cover inflation, he said, rejecting the claim the United States is experiencing a "hot" job market.

"To call something hot, you need to see some heat," he said, adding that the economy can tolerate a lower jobless rate than the Fed previously thought.

'I FULLY INTEND TO SERVE'

And because of the shortage of workers, companies are bringing marginalized people back into the workforce, he said, which "just says how important it is for us to continue to sustain this expansion."

"That's why we're so committed to using our tools to sustain the expansion," he said in response to a question from a legislator.

Under questioning from Democratic committee Chair Maxine Waters, Powell said he would rebuff a demand from Trump that he resign.

"Of course I would not do that," Powell said. "The law clearly gives me a four-year term and I fully intend to serve it."

Powell has brushed off Trump's frequent attacks, saying the Fed does not pay attention to politics.

While he steered clear of commenting on Trump's aggressive trade policies, especially against China, Powell said in his prepared testimony that businesses and farmers now "report heightened concerns" about the US economy.

Meanwhile, disappointing growth in China and Europe raised fears a weak global economy could affect US growth and this has contributed to slowing business investment and waning confidence, he said.

Kathy Bostjancic of Oxford Economics expects to see three rate cuts by January, which would reverse most of the increases in 2018 but she said the Fed would not adopt the 0.5 point cut financial markets were hoping for.

"The overall tenor of his comments lend support to our view that following a 25 bps rate cut in July, another rate cut is likely in September as global crosscurrents continue to exert downside risks," she said in research note.