What to expect from Fed Chairman Jerome Powell’s testimony

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Federal Reserve Chairman Jerome Powell is set to testify before the US Congress on Wednesday and Thursday. He is expected to clarify the Fed’s position on interest rates and speak on slowing economic activity coupled with increased risks.

Last week’s jobs report indicated that a surprising 224,000 jobs were added to the economy in June, exceeding the 160,000 predicted by economists. Stocks slumped in the aftermath as hopes for an interest rate cut have soured.

Until the report’s release, a stream of weak economic data and the threat of an ongoing trade war with China had fueled expectation amongst investors that the Fed would lower interest rates this month. Expectations were further confounded last month following the announcement of a trade war truce between US President Donald Trump and Chinese President Xi Jinping.

Powell’s testimony is an excellent opportunity for him to set the Fed’s position straight. Markets may get confirmation of a July rate cut, as well as the Fed’s longer-term plans. However, he is likely to keep silent on how deep the rate cut might be.

The prevailing view in the futures markets is a 100 percent likelihood of a rate cut of at least 0.25 percent at the next Federal Open Market Committee meeting later this month. The June employment report weakens the Fed’s position to deliver a deeper 0.5 percent that had previously been thought a possibility.

Rate cuts are often used in response to poor economic activity or general crises. However, in this instance the Fed may opt to reduce interest rates to curtail the possibility of a recession. Confusingly, inflation has failed to keep up with the Fed’s two percent goal, flummoxing expectations for the first half of 2019.

Powell has also had to deal with one challenge in particular that many of his predecessors have not – the White House. Powell has faced significant criticism from the Trump administration with the president allegedly telling confidants last month that he believes he has the authority to replace the chairman of the Fed. For months the president has been pressuring the Fed to cut rates. On July 5 he said on Twitter that, “Our Federal Reserve doesn’t have a clue! … Our most difficult problem is not our competitors, it is the Federal Reserve!”

The Federal Reserve’s independence ostensibly allows it to make politically indelicate decisions that are in the interests of the economy over the long-term. The upcoming hearings will give lawmakers in Congress the opportunity to either support Powell as independent, or echo President Trump’s criticism. This is a particularly salient point because a swing in either direction could have consequences for both the Fed’s ability to adequately enact policy and the boisterous calls that the president has been making regarding the central bank.