“Since [June]...it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted,” Powell said Wednesday during his testimony before the House Financial Services Committee.
Wall Street is pricing in a near 100 percent probability of a reduction in interest rates at the Fed’s July 31 meeting. On Wednesday, U.S. stocks soared after Powell’s comments. The widely watched S&P 500 index crossed 3,000 for the first time and ended the day just shy of that level. The tech-heavy Nasdaq closed at a new record high.
“Jay Powell fully endorsed the July rate cut and did absolutely nothing to pull the markets back from that expectation,” wrote Peter Boockvar, chief investment officer at the Bleakley Advisory Group, in a note to clients.
Other top Fed officials have given even more explicit hints that rate cuts are coming.
“Sitting here today I would argue for a 25 basis point cut at the next meeting,” said James Bullard, president of the St. Louis Fed, who wanted to see a cut in June but lost that fight. “I put 50 basis points worth of reductions by the end of the year. So that would mean this cut plus another one at some point later in the year.”
The latest stock market highs are a direct result of “Powell’s Pirouette” on policy, said Ed Yardeni, an economist and president of Yardeni Research. At the start of the year, Powell wanted to be “patient” on any changes to interest rates cuts. But in June he signaled that a rate cut was likely even though the economy remains solid -- or even strong -- by many measures.
The U.S. economy is doing “reasonably well,” Powell said, but he noted that business investment has “slowed notably,” likely because of the uncertainty around trade and global growth. He also stressed that the economic gains have not been shared evenly by everyone. Hispanics, African Americans and people in rural communities continue to have a harder time finding jobs that pay well.
Numerous representatives tried to get Powell to comment on whether a minimum wage increase to $15 an hour would be a wise idea, but he refused to offer any opinions on that or other contentious political issues such as trade policy.
“The question of the minimum wage is squarely in your court, not ours. We just don’t take a position," Powell said.
Trump is making the strong economy a centerpiece of his reelection campaign and he wants the Fed to help boost growth ahead of the 2020 election. In his latest effort to bend the Fed to his will, Trump last week said he plans to nominate conservative scholar Judy Shelton and economist Christopher Waller to fill the final two seats on the Fed board. Shelton and Waller both support lowering rates.
Powell has stressed that the Fed will do what is best for the economy and does not take political considerations into account.
“Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on objective analysis and data,” Powell said Wednesday. “We appreciate that our independence brings with it an obligation for transparency so that you and the public can hold us accountable.”
The benchmark interest rate is currently 2.35 percent, the highest rate in over a decade but a low level by historical standards. The Fed is widely expected to lower the rate to about 2.1 percent by the end of the month, which should provide extra stimulus to the economy, an unusual move at a time when unemployment is at a half-century low.
When unemployment has been this low in the past, inflation has typically risen, forcing the Fed to raise interest rates to keep inflation from spiking. But since the Great Recession inflation has remained below the Fed’s target. Powell told Congress that he thinks the labor market isn’t as “hot” as it could be and there is still more room for wages to rise and Americans to get jobs without triggering inflation.
“We don’t have any evidence for calling this a hot labor market. To call something hot, you need to see some heat,” Powell said.
Trump handpicked Powell, a lawyer and registered Republican, for the top leadership post at the Fed. But the president has expressed some regret about his choice. Trump has publicly urged the Fed to cut rates and called Powell three times this spring, according to calendars released by the Fed. Trump’s actions are highly unusual and break with the precedent set by recent presidents not to try to influence the central bank.
“Our most difficult problem is not our competitors, it is the Federal Reserve!” Trump tweeted Friday, adding that the Fed “doesn’t have a clue!”
In June, the president said he believes that he has the right to demote Powell and select a new chair, but the law indicates that Fed leaders can only be removed “for cause,” which courts have generally interpreted as criminal wrongdoing.
Powell has said he fully intends to serve out his term through 2022. When House Financial Services Committee Chair Maxine Waters (D-CA) asked Powell what he would do if the president told him to pack up and leave, Powell was clear he would no go.
“Of course I would not do that,” Powell said. “What I’ve said is the law clearly gives me a four-year term and I clearly intend to serve it.”
Trump’s top economic adviser said Tuesday that Powell’s job is safe for now.
“There is no effort to remove him. I will say that unequivocally at the present time. Yes, he’s safe,” Larry Kudlow said at a CNBC Capital Exchange event. “To be very clear, there are no plans presently to change Mr. Powell’s job or any of that sort of thing.”
Many in Congress has spoken in favor of Powell and that support continued on Wednesday with both Republicans and Democrats expressing support for the Fed’s top official.
“I think you are doing an outstanding job, Chair Powell,” said Rep. Andy Barr (R-KY), who was critical of previous Fed chairs.
Democrats were even more forceful in urging Powell to remain strong against Trump’s criticism.
“Stay strong. Be courageous. It is important for this nation and the economy of the world that the Federal Reserve remain strongly in dependent. Have no fear. The president can’t fire you. We in congress, both Democrats and Republicans, got your back,” said Rep. David Scott (D-GA).