USD Drops, S&P 500 Hits Record on Dovish Fed Minutes, Powell Testimony

Daniel Fowler
July 12, 2019

Federal Reserve Chairman Jerome Powell on Wednesday set the stage for the first USA interest rate cut in a decade later this month, pledging to "act as appropriate" to defend an economic expansion threatened by trade disputes and a global slowdown.

In his testimony to Congress, Mr Powell pointed to "broad" global weakness that was clouding the USA economic outlook amid uncertainty about the fallout from the Trump administration's trade conflict with China and other nations.

Some businesses, particularly in manufacturing, have pulled back on spending and hiring because of greater uncertainty about US trade disputes, Fed officials said, according to minutes of the June 18-19 meeting released Wednesday. "That is very broad across Europe and around Asia, and that continues to weigh", the head of the US central bank said.

The bullion rose further during the ensuing electronic trading. We have agreed to begin (trade) discussions again with China, and that is a constructive step.

Several policymakers appeared to support cutting rates soon essentially as an insurance policy, because it "could help cushion the effects of possible future adverse shocks to the economy".

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While testifying before the House Financial Services Committee, Powell reiterated that the Fed will act as appropriate to sustain the current economic expansion.

But the US central bank is now laying the groundwork for its first policy shift triggered by tweets, as Fed officials grapple with how the ground shifted on May 30 when US President Donald Trump threatened on Twitter to impose new import tariffs on Mexico if it did not agree to curb the flow of migrants across the US-Mexico border.

Four hours later, the Fed is due to release the minutes from its last policy meeting, when officials edged toward a rate cut as early as this month.

While speaking at an economics conference organized by the Federal Reserve Bank of Atlanta, the bank's president, Raphael Bostic, said that the Fed is in a good position right now on both jobs and inflation and argued recent low readings on inflation are "noisy", while other data suggest that the Fed is "close to" its 2% target and not slipping away from it, per Reuters.

"The Fed sees trade tensions in the context management - they require an insurance cut hedge the fat tail risks of trade becoming a larger drag on growth", Swonk said. "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". Expectations of a 50 basis point rate cut have fallen to 5.9% from 25% last week, propelling the dollar index to a three-week high.

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