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The stage is set for the Federal Reserve to slash interest rates this month

Jerome Powell

  • Wall Street is all but certain that the end of the Federal Reserve's three-year hiking campaign is here.
  • The only question left seems to be: How low will borrowing costs go this month?
  • The market held onto expectations that policymakers will lower the benchmark interest rate by 25 basis points. 
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Wall Street is all but certain that the end of the Federal Reserve's three-year hiking campaign is here. The only question left seems to be: How low will borrowing costs go this month?

Fed Chairman Jerome Powell on Wednesday signaled that the central bank would slash interest rates during its two-day meeting in late July. Policymakers have dimmed their outlook for the economy since last increasing interest rates in December, citing cooler global growth, below-target inflation levels and ongoing trade tensions. 

"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 US economic outlook," Powell said in testimony before the House Financial Services Committee.

He repeated that the central bank would act appropriately to sustain the expansion, which last week became the longest in history. The probability of a half-percentage-point cut ticked higher on Wednesday, according to CME Group, but most still expected that policymakers would lower the benchmark interest rate by 25 basis points. 

On Wednesday afternoon, minutes from the last Federal Open Market Committee meeting in June confirmed that some policymakers saw lower interest rates on the horizon. 

"Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective," the minutes said. 

Hopes that the Fed would step in to keep the economy humming have risen sharply since May when trade negotiations between the US and China stalled. Talks have since restarted, but more than $350 billion worth of tariffs remain in place with no timeline on progress. 

"My sense is that Powell is more concerned about global financial conditions … than he is pacified by a strong US labor market," said Jim Caron from Morgan Stanley Investment Management.

With the labor market growing at a solid but cooler pace this year, not all policymakers see the case for easing monetary policy right away. The monthly jobs report out last week showed that US hiring rebounded last month. On average, the economy has added 172,000 nonfarm payrolls per month between January and June. 

"There's no immediate need to move rates in either direction at this point in my view," Federal Reserve Bank of Philadelphia President Patrick Harker said in an interview with the Wall Street Journal on Monday. 

Government debt yields, which move inversely to prices, fell following Powell's testimony. The yield on the 10-year Treasury note fell slightly 2.046%, and the yield on the 2-year slipped to 2.205%. 

"Looking at the Treasury market before and after the release of Chair Powell's prepared Testimony, markets appear to have been expecting him to offer a bit of resistance to the idea that a rate cut at the end of this month is a done deal," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. "That didn't happen."

The next policy announcement is set for July 31. 

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SEE ALSO: US-China trade talks could get off to a rocky start this week as the two sides remain far apart on key issues

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