Trade, growth concerns continue to weigh on U.S. economy

Daniel Fowler
July 11, 2019

Federal Reserve Chairman Jerome Powell says that Facebook's new digital currency, Libra, "raises many serious concerns" and will be closely monitored by US and overseas regulators.

He also contrasted the Fed's "baseline outlook" of continued USA growth against a considerable set of risks - including persistently weak inflation, slower growth in other major economies, and a downturn in business investment driven by uncertainty over just how long the Trump administration's trade war with China and other countries will last.

The Fed, which hiked rates four times past year, has kept its current benchmark overnight interest rate in a range of between 2.25 and 2.50 per cent since December.

Powell also said that while US unemployment remains low at 3.7%, wage growth is not indicating an overheated jobs market and inflation "continues to be muted". He contends that the central bank made a huge mistake by tightening credit too much last year and should be cutting rates now, arguing that last year's rate hikes have hurt economic growth and depressed the stock market. 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.

Minutes from the Federal Open Market Committee's June meeting were also released Wednesday and revealed officials perceived economic risk as having "increased significantly" - strengthening the case for a rate cut, according to the Street. As the economy recovered the central bank began slowly raising rates. Rates remained close to zero for years.

In his testimony, Powell said the economy has fared reasonably well over the first half of the year.

David Marcus, Facebook's blockchain lead and the head of Calibra, a subsidiary which will build a digital wallet for the cryptocurrency, responded to some questions by the Senate Banking Committee on Tuesday.

The Fed chairman told the House committee that he thinks average worker pay isn't rising fast enough to accelerate low inflation, even with the unemployment rate near a five-decade low.

S&P 500 hits 3000 as Powell's comment lifts rate cut hopes
The Fed has raised rates nine times since 2015, four increases coming under Powell's leadership. "He's not doing that". "Pack up. However, as Powell noted, "crosscurrents" concerning trade policies and global growth have reared their head.

Powell said the Fed has established a working group to follow the project and is coordinating with other central banks across the globe.

"Equities across the globe are likely to hold their breath as markets ponder whether Powell would confirm or downplay expectations for a potential USA rate cut this month", FXTM research analyst Lukman Otunuga wrote in a note.

The strong comments from the most powerful US financial regulator underscored the growing regulatory hurdles facing the proposed cryptocurrency, which has drawn scrutiny from policy-makers globally.

The Fed last cut rates in 2008 at the height of the financial crisis.

After Powell's remarks and the Fed's minutes, interest rate futures appeared to price in greater odds of an aggressive rate cut this month.

This was despite last week's strong USA jobs figures and an easing of trade tensions with China.

That step eased fears that Trump would extend punitive tariffs to an additional $300 billion in Chinese goods, in the process inviting retaliation from Beijing on American exports and likely weakening both nations' economies.

However, not all members are completely convinced that rate cuts are necessary at this time as several members voiced that they did not see a strong case for rate cuts when the Fed met last this past June.

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