All Eyes Turn to Fed as Investors Look for Rate Cut Signals

July 9, 2019 Updated: July 9, 2019

WASHINGTON—Investors, seeking interest rate cut signals, will eagerly watch Federal Reserve Chair Jerome Powell as he delivers two days of testimony on Capitol Hill beginning July 10.

The U.S. stock market rallied during much of June with rising expectations for an interest-rate cut from the central bank. The S&P 500 index rose 7 percent in June, recording its best June in decades.

However, stocks have fallen since July 5 from all-time highs after the release of strong jobs data, which lowered hopes of a rate cut in July.

Powell is scheduled to testify on the economic outlook and recent monetary policy actions in both the Senate and the House, and traders hope to get more clarity about the Fed’s plan on its benchmark rate.

Powell signaled in June, for the first time, openness to cut interest rates, saying that the central bank was closely monitoring risks related to the trade tensions and would “act as appropriate to sustain the expansion.”

The U.S. economy recently reached 10 years of economic expansion, the longest period on record since 1854.

Market Expectations

The Fed will announce its decision on interest rates at the conclusion of the Federal Open Market Committee’s two-day meeting on July 31.

Traders are now pricing in a 100 percent chance of a rate cut by the end of this month, according to the CME FedWatch tool. Nearly 96 percent of traders expect the Fed to lower the rate by 25 basis points in July and the remaining 4 percent expect 50 basis points cut.

According to Citi, an interest-rate cut is now less likely given the solid job data and easing of trade tensions between the United States and China after the G-20 summit.

“Fed officials have only two weeks until the next ‘blackout period’ in which to shift market expectations for rate cuts,” Andrew Hollenhorst, Citi analyst wrote in a report. “Chair Powell’s congressional testimony takes on increased significance in this context.”

The U.S. economy added 224,000 jobs in June, beating expectations. However, Hollenhorst noted that the further slowdown in the forward-looking ISM manufacturing index increases the chance of a cut in July or later this year.

The ISM manufacturing index, a closely watched economic gauge, dropped to a reading of 51.7 in June from 52.1 in May. The index represents the share of businesses that expanded activity during the month. Hence the reading above 50 represents growth of the manufacturing segment of the economy.

Although the manufacturing activity beat the expectation in June, it’s much lower than the 60.2 percent registered a year ago.

‘He Is Safe’

Trump has long been critical of the Fed, calling it the biggest problem for the nation’s economy. He began openly criticizing the central bank and its chief in 2018.

The Fed raised rates seven times during the Trump administration, with the last hike triggering stock market turmoil in December 2018. The central bank has held the rates steady since then.

The Trump administration is making “no effort” to replace Powell, according to chief White House economic advisor Larry Kudlow.

“I will say that unequivocally, at the present time, yes, he is safe,” he said at CNBC’s Capital Exchange event on July 9.

Kudlow also said the Fed had room to reduce interest rates this month, adding that the board could “take back the December hike.”

He noted that the central bank should focus on price-level stability rather than jobs data.

“I’m not here to bash the Fed, and I respect their independence,” he said.

“I’m just saying analytically, so I look at things like the inverted yield curve, which I find somewhat troubling and I think is a signal to the Fed; if anything, it’s a deflationary signal.”

Follow Emel on Twitter: @mlakan