Thursday, July 11, 2019

Chairman Powell's Congressional Testimony

Federal Reserve Chairman Jerome Powell concluded his bi-annual report to Congress today as required by the Humphrey-Hawkins Act. His primary concerns were with issues around trade uncertainties, global manufacturing, global growth, and low inflation.

Chairman Powell described the US economy as being in "a very good place." and told Congress, "We want to use our tools to keep it there. It is very important that this expansion continue as long as possible."

In his Senate testimony, Chairman Powell talked about the Fed's concerns about persistently low inflation in the US. Low inflation has been a chronic economic problem in Japan and Europe for decades.  He cited these concerns as a reason for growing support for rate cuts. Cutting interest rates is a tool the Federal Reserve uses to boost inflation. Based on Chairman Powell's testimony, and recent comments from other Fed Governors, Investors believe a July rate cut is nearly guaranteed.

Given the current state of the US economy, it is unclear what effect a rate cut will have. The current unemployment rate is 3.7% and recently ticked up as more people have entered the workforce. Inflation is below the Federal Reserve's 2% target as it has been for some time. A rate cut under these economic conditions demonstrates the weight The Fed places on its inflation target.