July 10, 2019 / 1:02 PM / 3 months ago

Instant view: Powell - Fed stands ready to act "as appropriate" to sustain expansion

(Reuters) - Concerns about trade policy and a weak global economy “continue to weigh on the U.S. economic outlook” and the Federal Reserve stands ready to “act as appropriate” to sustain a decade-long expansion, Fed Chairman Jerome Powell said on Wednesday in remarks that could bolster expectations of an interest rate cut later this month.

FILE PHOTO: Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee meeting in Washington, U.S., June 19, 2019. REUTERS/Kevin Lamarque/File Photo

Story:

KEY POINTS:

** Powell says it appears trade uncertainties and concerns about global economy continue to weigh on U.S. economic outlook

** Powell repeats that Fed will act “as appropriate” to sustain economic growth

** Baseline outlook is for U.S. economic growth to remain solid, labor markets to stay strong and inflation to move back up to central bank’s 2% target - Powell

** Powell says there is a risk weak inflation will be even more persistent than Fed currently anticipates

** U.S. economic growth appears to have moderated in Q2; economic momentum appears to have slowed in some major foreign economies in recent months, Powell says

MARKET REACTION:

STOCKS: S&P 500 e-mini futures EScv1 reverse early weakness, last up 0.45%, pointing to higher Wall Street open

BONDS: U.S. Treasury yields fall; 2s US2YT=RR at 1.85%; 10s US10YT=RR at 2.0474%

FOREX: The U.S. dollar index .DXY extended losses and was last off 0.4%

COMMENTS:

DAVID CARTER, CHIEF INVESTMENT OFFICER, LENOX WEALTH ADVISORS, NEW YORK

“The Fed’s in a tough spot, the economy seems to be chugging along but the pressure is building to drop rates.”

“There continues to be uncertainty around economic growth outside the US and trade concerns linger. This alone may support a cut in rates if only for insurance.”

“Powell has room to lower rates as long as inflation continues to be quite muted. It’s unclear to us if the market will be satisfied with a small 25 bp cut or is expecting a 50 bp cut. Either way we believe a cut is coming this month.”

“Powell’s situation is unique in that the president has strongly expressed his views.”

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH

“Everyone is worried about trade globally. Trade has slowed down the worldwide economy. Until that is corrected, the Fed is probably going to more accommodative.”

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC

“Powell’s really making the case that an insurance rate cut is important so July is looking much more likely despite the fact we had a pretty good jobs report. Because of that both stock and bond markets are reacting.”

“What Powell’s been talking about is that business investment has slowed notably. Housing investment and manufacturing appear to have decreased in the second quarter.

“He’s laying out the case for a slowing investment climate in terms of business spending. That’s where he’s getting the idea that we need to have an insurance rate cut. He’s coming across as very dovish. A lot of his quotes are much more on the easing side.”

“He did make the point the Fed is independent. He wants to continue to lay out the case the Fed is cutting rates because of business conditions and not because President Trump has been very publicly advocating for cuts.”

ART HOGAN, CHIEF MARKET STRATEGIST, NATIONAL SECURITIES, NEW YORK

    “There are a couple things that lean more on the dovish side than the last policy statement and that is really supporting the view that the Fed will likely cut in July. The same concerns of trade and cross currents continue to be in there but the pace of the economy has slowed in the second quarter has been hinted, making it more appropriate to cut rates. It appears as though what the Fed has put out in its commentary is in line with market expectations.”

    “The one-liner is that they are still going to say that they will “act as appropriate” to sustain the economy and there is a potential of this being interpreted as overly dovish or of dovishness that we have already baked in.”

    “The agnostic here is that we got better jobs numbers in June than May so the main concern here isn’t the labor market and the Fed isn’t really looking at one piece of data because there is in fact moderating growth in the second quarter. So it certainly feels as though this is a Fed that is accommodative.”  

    “But understand that the Fed still has a plethora of information that will come their way between now and the meeting at the end of the month. We have inflation data this week, housing market reports in the next few weeks and on top of that we would have heard from 150 of the S&P 500 companies, so all of that will have an impact on the Fed’s next move.” 

    “The only surprise is that Chairman Powell has not walked back from any of his previous comments.” 

JUAN PEREZ, SENIOR CURRENCY TRADER, TEMPUS INC, WASHINGTON

“There is now economic evidence that the outlook for the U.S. economy is not that great. Ultimately what that means is that the Federal Reserve will need to intervene, and they’re sounding dovish right now. And the dollar will get hurt as a result.”

MICHAEL POND, HEAD OF GLOBAL INFLATION-LINKED RESEARCH, BARCLAYS, NEW YORK

“The market is focused on the part of Powell’s testimony where he says “uncertainties continue.” And that led the market to think that uncertainty alone, rather than the incoming data, is enough to get them to move, likely 25 basis points, at the end of this month. And so were seeing a bit of a bull steepening in Treasuries, a rebound in equities, a bounce in breakevens, which is also being helped by the move up in oil futures overnight.”

“It does lead the market to think that the Fed is moving as an insurance cut. If the economy is deteriorating and the Fed is cutting, all they’re doing is offsetting weaker growth. But if growth is fine and they’re cutting, then that leads the market to think this is much more of an insurance cut, which could boost risk assets and that’s in part why we’re seeing a bounce in breakeven inflation rates.”

JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET CAPITAL MANAGEMENT, CHICAGO

“Fed funds futures had a 100% chance of a rate cut and it certainly looks like we are going to see a rate cut later this month. The jury is out, though, on the one full percentage point cut over the next 12 months, that still remains to be seen.

“Given that it was a 100% expectation, the best they could hope for was expectation, so I’m sure there was some lingering doubt among equity investors. When you see a 100% chance of anything, it causes some concern. Powell is setting it up, certainly for a July rate cut. To me, it all depends on where you look in the economy. But over the last decade, the Federal Reserve has been banging the inflation beehive with a baseball bat and the bees haven’t come out, so they figure keep trying this until something happens.”

Compiled by Alden Bentley

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