Fed's Powell states that global trade and growth continue to weigh on the US economy By Reuters

By Howard Schneider

WASHINGTON (Reuters) – Concerns over trade policy and weak global economy "continue to weigh on US economic prospects" and the US Federal Reserve is ready to "act appropriately" to support an expansion of the US economy. Ten years ago, said Fed Chairman Jerome Powell Wednesday in remarks that could boost expectations of a reduction in interest rates later this month.

In an address to a congressional committee, Powell compared the Fed's "basic outlook" on continued US growth to a significant set of risks – including persistently rising inflation, slower other major economies and a slowdown in business investment, motivated by the uncertainty weighing on investors. how long will the Trump administration's trade war with China and other countries last and how intense it will be?

At their June meeting, Fed officials said these concerns may justify lower rates. "Since then, according to incoming data and other developments, it seems that the uncertainties surrounding trade tensions and concerns about the strength of the global economy continue to weigh on the US. Powell said.

"The apparent progress on trade has created greater uncertainty, and our contacts in the fields of business and agriculture have revealed increased concern about the evolution of trade", said Powell, noting that business investment, a key component of economic growth, "appears to have slowed significantly" in recent months. .

Overall growth is also "moderate," said the head of the Fed, while there "is a risk that low inflation is even more persistent than we currently expect," though without 39, to prove as transitory as Fed officials have often insisted.

"Powell is preparing it, certainly for a rate cut in July," said Jack Ablin, Cresset Capital Management's chief investment officer in Chicago. "For me, it all depends on your economic situation, but over the last decade, the US Federal Reserve has beaten the hive against inflation with a baseball bat and the bees have not gone out, something is happening. "

US stock index futures rose and became positive the day after Powell's remarks came out, while the US dollar was down against a basket of other currencies. () () Government bond yields declined as two-year Treasuries () fell below 1.87% from around 1.93% earlier Wednesday morning. At the same time, interest rate futures seemed to take into account the likelihood of an aggressive 50 basis point decline this month.

FACING THE CONGRESS

Mr. Powell will make his remarks and answer questions from members of the US House of Representatives Financial Services Committee at 10:00 am EDT (14:00 GMT). He will testify again Thursday before the Senate Banking Committee.

His appearances come at a particularly sensitive time for the Fed and for Powell personally, President Donald Trump reproaching his Fed chief, chosen by hand, for not having lowered interest rates, which, of the opinion of Trump, unnecessarily slows the economy.

At the same time, in the view of the Fed, Trump's own policies – including higher tariffs and a somewhat unpredictable approach – have increased economic risks and led them to consider the same rate cuts requested by Trump.

The Fed has maintained its current overnight rate in a range of 2.25% to 2.50% since December.

Since a series of Trump's commercial tweets in late May, investors and the Fed have begun to shift positions, with markets now expecting a reduction of at least a quarter point when policymakers Fed will meet at the end of the month.

The US economy has changed little in the days following Trump's May 30 comments on Twitter threatening to impose tariffs on Mexico, unless the country meets its requirements for more control. immigrants crossing its northern border.

But Trump's statements have scared the financial markets so decisively, and the threats to the global economy have become so palpable, that a rate reduction of at least 25 basis points appears now as a certainty, a reduction of 50 basis points being also considered as additional protection. .

"The Fed has never disappointed a market with such strong expectations," wrote Joseph Lavorgna, chief economist for the Americas at Natixis.

While investors in contracts linked to the Fed's overnight targeted rate of financing established a probability of rate cuts close to 100%, "it would be unprecedented for the Fed not to reduce," wrote Lavorgna.

After Wednesday's hearing, the Fed should release the minutes of its last political meeting, which should show how much the central bank's thinking has evolved in the days following Trump's tariff threat in Mexico, and how the discussion has been shaped by other concerns, including low inflation.

Although US economic growth remains largely on track and the June employment report indicates strong hiring, the events of May have changed US trade policy as a secondary concern of the Fed. a central concern.

Previous US tariff series on trading partners, including China, had been ruled out on the grounds that their macroeconomic importance was minimal, as the Fed still expected early May that its key rate would remain unchanged for the rest of the year.

In contrast, the higher tariffs announced against China in early May, a growing sentiment that the world's two largest economies may not be able to reach an agreement, and the tariff threat against Mexico have added to the Growing sense that protectionism and higher tariffs were here to stay – at a cost of investment and growth.

TARIFF THREATS

The argument in favor of a reduction in borrowing costs is not completely decided. Reducing rates at this stage would be similar to the Fed's efforts in the mid-1990s to manage a long recovery rather than react to an impending slowdown, and "there is no immediate need for them." to act, "said Philadelphia Fed President Patrick Harker on Tuesday.

But Trump's tweets about Mexico have had a particularly troubling impact, sparking enough volatility and doubts about the future, prompting the Fed to turn to the rate cuts that Trump has demanded for the future. 39, other reasons.

While Trump was linking threatening tariffs, which would have touched one of the most integrated supply chains in the world, with uneconomic immigration requirements, investors were able to reduce by as much as 25 % federal funds rate expected for the end of the month. 2019.

This has added an additional rate cut to that already anticipated by investors and added market pressure to the growing list of Fed concerns.

At the Fed's last policy meeting in mid-June, eight of the 17 policymakers felt it necessary to cut at least one rate by the end of the year. Powell told reporters that many others were inclining in that direction. The report, due out at 2 pm (1800 GMT), can show how strong this feeling has become.

In the Fed's monetary policy report released last week before Powell's testimony, the trade war received its own badysis, a sign of the attention it is drawing within the central bank.

The Fed's services concluded that rising global tariffs likely had a "material" impact on the slowdown in global trade last year and that "the uncertainty surrounding trade policy could cause companies to delay their investment decisions and to reduce their capital expenditures ".

Although the tariff threats on Mexico have never materialized and China and the United States have agreed to resume negotiations for a trade agreement, "this has hardly alleviated The uncertainty that, according to Fed officials, would help slow global trade and national investment plans, "The US Economic Team at Deutsche Bank wrote this week.

(For a chart on "Powell's not a stranger on Capitol Hill," click https://tmsnrt.rs/2JAUmkH)

(For a chart of the US 5-year and 5-year balanced inflation rate, click on https://tmsnrt.rs/2PdzVzO).