Fed chief will "walk the tightrope over Niagara Falls"

When appearing before Congress on Wednesday and Thursday, Federal Reserve Chairman Jerome Powell should discuss the slowdown in economic activity and increased risk, demonstrating that the Fed is ready to lower interest rates if necessary.

But it is also likely that Powell will let the markets – and the White House – guess when and how deep the Fed intends to reduce its share prices when it meets at the end of July. The prevailing view, embedded in the futures market, is a 100% probability of a quarter-point rate reduction on July 31st.

"Nothing in what he has to do over the next two days is like walking the tightrope over Niagara Falls," said Julian Emanuel, BTIG's chief equity and derivatives strategist.

The only difference of opinion on the markets could make trade volatile, when Powell will appear before the House Financial Services Committee on Wednesday morning and before the Senate Senate on Thursday. Powell pleaded for rate cuts when he spoke after the Fed's last meeting, stressing that the global economy and trade wars posed a risk to US growth.

"He will do his best to play against both sides.If you testify before Congress, you do not want to tell Congress:" Things are slowing down, and I'm going to cut, cut, cut, "said Peter Boockvar, director investments at Bleakley Advisory Group. "He will tell Congress that the economy is good, but there are pockets, and he will play the idea of ​​a reduction in insurance. Congress is his boss. You do not want to tell the boss that you're late, and the December rate hike was a mistake. "

The surprisingly strong report of 224,000 jobs added last June last Friday raised doubts as to the need for the Fed to cut a half percentage point in July, as some of them said. discounted, but the market remains convinced that the central bank will reduce its rates by at least a quarter point.

Emanuel, however, said the Fed had room for maneuver and that it was finally expecting half a percentage point of reduction this year, but that it could start in September instead of July.

Others, like Jim Caron, a portfolio manager at Morgan Stanley Investment Management, expect a half-percentage point rate cut as early as late July.

"My feeling is that Powell is more concerned about the global financial situation (low global PMI, low global inflation, slowing growth everywhere) than he is pacifying it by a strong US labor market," writes Caron in a email. "I know the market is priced at 25bp in July, I'm approaching 50bp, but it's close.I think it's a closer call than the market price. . "

More than any other Fed chief, Powell has been facing a wave of public criticism from a president who does not agree with the way the Fed has managed its monetary policy. President Donald Trump would also have considered replacing the Fed chief, but Larry Kudlow, senior economist at the White House, said on Tuesday that the president had no plans of this type for the time being.

Nevertheless, Congress should focus on the theme of the Fed's independence.

"If he has to repeatedly assert his political independence during the Q and Q period, it is very difficult to see how that would not sound more hawkish than the market predicts, given the fact that it's not going to make any sense. insistence of the president on a too restrictive monetary policy, "said the president. Emanuel.

Michael Arone, chief investment strategist with State Street Global Advisors, said the Fed chief's remarks might sound far-fetched, but the minutes of his latest meeting, expected Wednesday afternoon, could to be relaxed.

"Markets will see a healthy debate on the opportunity to lower rates in June," he said, noting that St. Louis Fed President James Bullard had disagreed.

Arone said Powell's testimony could disappoint investors, who hoped the timing of the interest rate cuts would be clarified, and how much the Fed would be willing to change the target range of federal funds, currently between 2.25% and 2.50%.

"With the report on employment and the stock market at unprecedented highs, I think President Powell and the Fed will want to keep their options open.He will not want to be seen yielding to political pressure," he said. Arone.

The Fed also faced financial market rage, which reacted violently to its latest rate hike in December and was subsequently appeased when the Fed suspended its hike policy. The Fed has now moved from a neutral policy to a dovish policy or rate reduction.

"The bond market is well regulated.It involves a complete reduction in the rate.If it departs from this, it will be firework.If it reaffirms the reduction, it backs down. then the possibility of a reduction in the rate of September, the markets have to readjust … would be his way of saying, this is not the beginning of a cycle of rate reduction, it's just some adjustments, " said Boockvar.

Ralph Axel, strategist in charge of the US rate at Bank of America Merrill Lynch, said he expects a quarter point cut in July. He also expects Powell to repeat the reasons for the cuts outlined in the Fed's monetary policy report released last week before the president's testimony.

"The key paragraphs are that economic activity has become more retrograde and that this term has been used – reprobated … It's a new position, more moderate data, more uncertain prospects", a- he declared. see a reduction in the Fed's rate.

"He will not pre-engage in any political action – he wants to deter the market from cutting rates in July, he has to do it this week," said Axel. But he said that it is very unlikely as this would be inconsistent with the Fed's recent statements and its policy report.

"It's not entirely clear to me that after Thursday we will have a much clearer picture," Emanuel said.

Congress is also likely to hear a new message from the Fed, Powell recently said, as the Fed moved from a neutral stance to a rate-cutting stance.

"His new language is" we are ready to act appropriately to support the expansion, "said Axel." It's his new mantra. That's his new slogan. It's so unlikely for me that it's pushing back. He is pushing a huge rock in the mountain to move the market after a July cup. "

Axel said the Fed would not be influenced by the strength of job growth in June.

"There is a lot of noise and they do not want to be enveloped," he said. "The six-month moving average wage bill was 220,000, 230,000 jobs a month and has now dropped to 171,000 per month." The six-month moving average has dropped. morose. "

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