Dow Suddenly Recovers After Fed Chair Powell Tees Up a Rate Cut

A man walks past an electric screen showing Japan's Nikkei and Shanghai Stock Exchange markets' indices outside a brokerage in Tokyo

Stocks rallied Wednesday as Federal Reserve Chairman Jerome Powell testified about challenges the US economy faces, adding to expectations that the central bank will cut interest rates later this month.

In his prepared statement, Powell said that since Fed officials met last month, "uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook". The minutes show FOMC member concern over soft economic data such as the weak jobs report from April, weakening indicators for business confidence and spending, decreased manufacturing activity and the ongoing trade tensions - mainly between China and the US.

President and founder of MacroPolicy Perspectives Julia Coronado, who is a former Fed economist, tweeted as the hearing was still going on that Powell's oral testimony "confirms" that a 25 basis point rate cut "is coming in July".

Powell was not explicit, but in his prepared statement to the House Financial Services Committee he noted that the Fed in June announced it "would act as appropriate to sustain the expansion".

In the wake of Trump's aggressive trade policies, especially with China, Powell said businesses and farmers "report heightened concerns" about the United States economy. "I would say that the bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook".

The central bank raised the benchmark lending rate to 2.25 per cent to 2.5 per cent over four hikes in 2018 in what they called a policy normalization strategy.

But since criticism of the Fed by Mr Trump in May, both investors and the central bank have begun shifting their stance, with markets now expecting a cut of at least a quarter of a percentage point when Fed policymakers meet at the end of the month.

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"Uncertainties about the outlook have increased in recent months", he wrote. In January, as the global economy slowed, officials said they would be "patient" with future adjustments, signaling they had put rates on hold.

The case for lowering borrowing costs isn't fully decided.

Not all Fed officials were on board with a near-term rate cut.

"I have said what I have meant to say on this subject", he said, repeating a statement he made after the June Fed policy meeting that he fully intends to serve his four-year term as the central bank chief.

The greenback is under pressure in the early day, likely from some profit taking ahead of Fed Chair Powell's Testimony later today.

Though the threatened tariffs on Mexico never materialized and China and the United States 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 USA economics team wrote this week.

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