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This morning, Federal Reserve Chairman Jay Powell began two days of testimony before Congress.



Fed Chair Powell Testimony and FOMC Minutes

July 10, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

Written and Verbal Comments by the Fed Set the Stage for a July 31 Rate Cut

*     Federal Reserve Chairman Jay Powell began his two day testimony to Congress today.
*     In his prepared testimony Powell noted many factors that could justify a fed funds rate cut soon.
*     The minutes of the Federal Open Market Committee meeting of June 18/19 were released today.
*     The minutes showed support within the FOMC for a fed funds rate cut soon.

This morning, Federal Reserve Chairman Jay Powell began two days of testimony before Congress. Today, he spoke to the House Committee on Financial Services. Tomorrow, Powell speaks to the Senate Banking Committee. In his prepared remarks this morning Powell listed many factors that could justify an upcoming fed funds rate cut. Powell noted a number of concerns specific to the U.S. economy: (1) inflation has been running below the FOMC’s symmetric 2 percent target, (2) inflation expectations may drop (related to #1 but forward-looking), (3) some demographic groups and some parts of the country still face economic challenges, (4) growth in business investment has slowed, (5) housing investment has declined, (6) manufacturing output has declined, (7) trade tensions remain unresolved, (8) labor force participation in the U.S. is lower than in other comparable economies, (9) boosting productivity growth should remain a high national priority, (10) the level of uncertainty has increased and (11) business confidence has declined. Also Powell noted that international economic conditions have deteriorated and there is cause for further concern about Brexit. Further, Powell said in his prepared testimony that in the last FOMC meeting, over June 18/19, that many FOMC participants saw that the case for more accommodative monetary policy has strengthened. Powell also reminded the House committee that the Fed is prepared to adjust any of the details of balance sheet normalization in light of economic and financial developments.

Powell’s prepared remarks make a strong case for a fed funds rate cute on July 31. We continue to believe that the Fed will enact a 25 basis point rate cut at the conclusion of the next FOMC policy meeting over July 30/31. It is also possible that we could see a reduction in the pace of balance sheet runoff, but we view that as less likely than a rate cut.

The minutes of the FOMC meeting of June 18/19 show that the Fed is focused on three key areas. First are the increased uncertainties in the U.S. economy due to ongoing trade conflicts. Second is the potential for further cooling in the global economy. Third is below-target inflation in the U.S. and the potential for a decline in inflation expectations. The FOMC judged that uncertainties and downside risk factors had increased significantly in the weeks before the mid-June meeting. Nearly all participants had revised their assessments of the appropriate path for the fed funds rate downward. Many participants judged that additional monetary policy accommodation (lower interest rates) would be necessary in the near term if recent developments were sustained. Several participants noted that a near term cut in the fed funds rate could help cushion the effects of future shocks to the economy and was therefore appropriate from a risk management point of view.

Market Reaction: U.S. equity prices increased after Chair Powell’s prepared remarks were released this morning. The 10-year Treasury yield dropped to 2.07 percent. NYMEX crude oil is up to $60.50 per barrel on news of lower than expected U.S. crude oil inventories. Natural gas futures are up to $2.48/mmbtu.

For a PDF version of this report, please click here: Fed Chair Powell Testimony and FOMC Minutes

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