Bets on Steep Fed Rate Cuts Grow After Powell Comments


Investors' bets of a Federal Reserve interest rate cut this month grew after Fed Chairman Jerome Powell's testimony in the U.S. House.

The Fed chief did little to bat away investor expectations that the central bank will lower rates when it meets again July 30 and 31. He told lawmakers that uncertainties such as trade policy and slower global growth "continue to weigh on the U.S. economic outlook" and that many Fed officials think the case for a rate cut has strengthened.

One lawmaker asked Powell whether June's stronger-than-expected U.S. jobs report, which showed the country added 224,000 jobs in June, changed the Fed's outlook.

"The straight answer to your question is no," Powell said. He said the jobs report was among the "reasonably good news" the U.S. economy has seen, but he added that economic data have "continued to disappoint" in Europe and Asia and that manufacturing has been weak globally.

On the trade front, Powell said an easing of tensions between the U.S. and China was constructive but "doesn't remove the uncertainty" policymakers are seeing.

"The bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook," Powell told the House Financial Services Committee. "In addition, inflation continues to be muted."

Stocks rose after Powell's comments, with the S&P 500 up about 0.50% to 2,994.97 on the day as of 2:00 p.m. ET.

Investors also piled back into bets that the Fed will cut rates by 50 basis points in July, a bigger action than its usual 25-basis-point moves. Futures markets now see a roughly 73% chance that the Fed will lower rates by 25 basis points, and they see a 27% chance of a 50-basis-point cut, up from a 3% probability a day earlier, according to CME Group's FedWatch tool.

Powell "had a chance to disabuse markets of the notion that a July rate cut is sure thing, and he didn't take that opportunity," Avery Shenfeld, chief economist at CIBC Capital Markets, wrote in a note to clients.

The central bank is shifting away from its prior mantra of data dependence, wrote Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch. Officials seem to be willing to dismiss improved U.S. economic data, instead focusing on "global uncertainties and getting ahead of a slowdown," she added.

The Fed also seems to be listing below-target inflation as a reason to cut interest rates, Meyer wrote. The Fed's favored gauge of underlying inflation grew 1.6% year over year in May, and Powell said officials see a "risk that weak inflation will be even more persistent than we currently anticipate."

Source: S&P Global