Powell's testimony leaves Fed observers scratching their heads

Bloomberg News / Landov

Federal Reserve Chairman Jerome Powell made it clear this week in a Congressional testimony that the central bank was likely to cut interest rates in July. Nevertheless, the commentary on the future policy of the central bank is causing a remarkable discomfort.

Why are the Fed observers so confused?

"I do not think the [Fed] the policy makes sense, "said Ethan Harris, head of research in global economics at Bank of America, during an interview.

He noted that economic data had improved since the June meeting of the Fed.

Ward McCarthy, chief financial economist at Jefferies, expressed the same frustration.

"Jefferies Economics does not think a rate cut is necessary and we are not sure what the rate cuts will achieve," he said in an email to customers.

A reduction in the Fed will only "temporarily meet market expectations and appease the White House's Twitter account." After tasting at lower rates, both will want more, "added McCarthy.

In his testimony, Powell said that trade tensions and a weaker global economy weighed on prospects and that the Fed was ready to act.

Lily: Fed's Powell says trade concerns will dampen economy and lead to lower interest rates

Economists, however, said Powell ignored the June employment report and the trade truce with China.

"Powell basically told us that the employment report was not important. He removed from the table the most important indicator that you observe as a Fed observer, "Harris said.

The Fed chairman has also not given any "signpost" on the number of rate cuts this year, Harris said. James Bullard, of the St. Louis branch, a voter this year, said this week that he had announced a total of 50 basis points in rate cuts by the end of the year.

"It's a very unexplored territory," Harris said.

Julia Coronado, president of MacroPolicy Perspectives, said Powell's turn was imminent, as officials found that the risks of degradation worsened.

Richard Moody, Chief Economist at Regions Financial Corp, said the Fed simply thought its Fed funds policy rate was too high relative to market rates. Mortgage rates are down 100 basis points since last November, he said.

Moody said he did not expect market rates to fall after Fed cuts.

"It's just that the Fed is coming in," he added.

Return on 10-year Treasury Bills

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are also down more than a percentage point from their peak of 3232% achieved in early November for 52 weeks.

The Dow Jones Industrial Average

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is up 24% from the low of 21,792 reached just before Christmas.