Fed's Powell bolsters rate cut view on trade, growth concerns

FedWatch expectations for September 18

"We are in the camp and have been all year, and arguably wrongly, that the Fed becoming more dovish and cutting rates is not good for risk assets", said Neil Dwane, global strategist and portfolio manager at Allianz Global Investors.

On Thursday morning, most US stock index futures were high.

The Fed chairman told Congress in his semi-annual report that many in the US central bank believe a weakening global economy and rising trade tensions have strengthened the case for a rate cut.

Gus Faucher, chief economist at PNC bank, said there were sound economic reasons for a cut.

Trump has spoken out, both in public remarks and on Twitter, several times against the central bank, pressuring for lower interest rates.

Federal Reserve Chairman Jerome Powell says before the Senate Banking Committee that very low unemployment rates no longer necessarily push up inflation.

Prices ex-food and energy rose 0.3% between May and June, above 0.2% expected by market and 0.1% posted in May. The so-called core CPI was boosted by strong increases in the prices for apparel, used cars and trucks, as well as household furnishings. In the 12 months through June, the core CPI climbed 2.1% after advancing 2.0% in May.

The overall CPI edged up 0.1 per cent last month, held back by cheaper gasoline and food prices. "We have wages and benefits moving up at 3%, which is good because it was 2% a year ago, but 3% barely covers productivity increases and inflation... we haven't seen wages moving up as sharply as they have in the past".

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Meanwhile, used auto prices spiked 1.6 percent and an uptick in medical care costs also helped lift the index, according to the data. The Fed last month downgraded its inflation projection for 2019 to 1.5 per cent from the 1.8 per cent projected in March.

"What I have said is the law gives me a four-year term and I fully intend to serve it", Powell said in response to a question from committee chair Rep. Maxine Waters (D-Calif.).

"Our view is that down-side [negative] risks to the inflation outlook have continued to grow, with the New Zealand economy looking increasingly unlikely to be able to comfortably meet its inflation and labour market objectives", he said. Meanwhile, interest rate futures appeared to price in greater odds of an aggressive rate cut of half a percentage point in July. "I think this would be on the merits".

United States stock index futures gained early on Wednesday, turning positive after Powell's remarks were released, while the U.S. dollar fell against a basket of other currencies.

In Chinese stocks, mixed trends prevailed.

Economists polled by Reuters had forecast the CPI unchanged in June and rising 1.6% year-on-year.

Earlier rounds of U.S. tariffs on trading partners - including China - had been dismissed as of little macroeconomic importance, with the Fed in early May still anticipating its policy rate would remain unchanged for the rest of the year.

"The labor market has not weakened in a meaningful way since the escalations in trade policy a few months ago", said Daniel Silver, an economist at JPMorgan in NY.

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