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Powell to Congress: 'Uncertainties' continue to weigh on the economy

Brian Cheung

Federal Reserve Chairman Jay Powell plans to tell Congress that “uncertainties” continue to face the U.S. economy, just weeks ahead of the central bank’s next policy-setting meeting on July 31.

In its last meeting on June 19, the Fed opted to hold rates steady at the current level of 2.25% to 2.5%

“Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook,” Powell wrote in prepared remarks ahead of his double-header of testimony on Capitol Hill this week.

Ahead of Powell’s testimony, some on Wall Street speculated that he was going to push back on the possibility of rate cuts. But others say the Fed’s messaging on a rate cut has been too strong for policymakers to end up not following through.

Markets are closely watching for commentary on whether the Fed will end its cycle of interest rate hikes with an interest rate cut, the first in the post-crisis era.

Today at 10 a.m. EST, Powell will face the House Financial Services Committee for the first round of questioning from lawmakers. It will be Powell’s first public appearance since policymakers received new jobs data showing a healthy labor market that added an estimate-beating 224,000 jobs in the month of June.

Powell’s written testimony pointed to job gains as a sign that the labor market “remains healthy,” adding that job openings appear “plentiful.” But wage growth, which has ticked down from a yearly pace of 3.4% in February to 3.1% in June, has not applied too much pressure on inflation, which Powell noted as “muted.”

Federal Reserve Chairman Jerome Powell speaks speaks at "C. Peter McColough Series on International Economics: A Conversation with Jerome H. Powell" at the Council on Foreign Relations in New York, U.S., June 25, 2019. REUTERS/Brendan McDermid
Federal Reserve Chairman Jerome Powell speaks speaks at "C. Peter McColough Series on International Economics: A Conversation with Jerome H. Powell" at the Council on Foreign Relations in New York, U.S., June 25, 2019. REUTERS/Brendan McDermid

Powell’s testimony comes in a busy week of Fedspeak. Four other Federal Open Market Committee voting members — New York Fed President John Williams, Chicago Fed President Charles Evans, St. Louis Fed President James Bullard, and Fed Governor Randal Quarles — will all be making public remarks this week.

The Fed will also release minutes from its June 19 meeting on Wednesday, which could add some color to the committee’s decision to not move on rates, despite the fact that eight of the committee’s 17 members saw at least one 25 basis point rate cut coming by the end of 2019.

“Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened,” Powell wrote in testimony.

Tempering market expectations?

In the House Wednesday and in the Senate on Thursday, lawmakers will have plenty of opportunities to ask Powell about the economic outlook and the next steps on monetary policy.

Bank of America Merrill Lynch wrote July 5 it expects Powell to talk down a rate cut amid improved data, such as the jobs report.

“He would note that the Fed remains vigilant and stands ready to act to prevent below-trend growth. In other words, despite not cutting in July he would guide that the Powell pull remains,” the bank wrote.

Andrew Hunter at Capital Economics agrees, writing July 5 that the new batch of data does not appear “weak enough” for the Fed to cut rates now.

“If, as we suspect, Fed officials still want to wait for more data before pulling the trigger, Powell’s testimony and the release of the minutes from the June FOMC meeting may be used to further temper expectations of near-term rate cuts,” Hunter wrote.

But others on Wall Street say the messaging from the Fed has been too strong for the Fed not to follow through with a rate cut.

In the June meeting, the Fed did not move on rates but reflected a growing base of members within the committee seeing a case for a rate cut this year. And Powell noted that even members who did not vote for a rate cut saw a stronger case for more accommodation.

Analysts at JPMorgan Chase wrote that while easing is “not assured” in light of the stronger data, they expect Powell to signal that the Fed is on track for a 25 basis point cut in the July 31 meeting.

“The case for an ‘insurance’ ease remains strong as global growth momentum is slipping and the latest declines in U.S. and global business confidence have yet to be felt,” they wrote.

The rate path won’t be the only thing in focus for the Fed. Powell is also expected to face some questions about political pressure as President Donald Trump continues to publicly call for lower interest rates and quantitative easing. As of late, Trump has also hinted that the Fed should cut rates to help take some strength out of the U.S. dollar.

Powell has been firm in insisting that the Fed is independent, saying that by statute the Fed is “insulated” from short-term pressure. In his written testimony, Powell reiterated that Congress endowed the central bank with a firewall from executive branch control.

“Congress has given us an important degree of independence so that we can effectively pursue our statutory goals based on objective analysis and data,” Powell wrote.

Powell could also field questions on a number of other issues that have been hot topics within the D.C. beltway, such as the proper regulation of Facebook’s cryptocurrency Libra.

This story is developing.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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