Powell testimony to be studied for signs of coming rate cut

Every sentence Federal Reserve Chairman Jerome Powell speaks to Congress this week is sure to be parsed by investors who expect — and hope — the Fed will cut interest rates later this month for the first time in a decade.

Powell will testify for two days starting Wednesday at a time when the economic landscape is a mixed one: The U.S. job market appears resilient. Consumer spending and home sales look solid. But the economy is likely slowing. President Donald Trump's trade wars have magnified uncertainties. And inflation remains chronically below the Fed's target level.

Powell and the Fed have recently made clear they will do whatever they deem "appropriate" to sustain the economic expansion — a message that traders have interpreted to mean a coming rate cut. Indeed, when they met last month, the Fed's policymakers removed from their statement a reference to being "patient" about interest rates.

Some Fed watchers have suggested that cutting rates now would serve as a kind of insurance policy by the central bank against a potential economic downturn.

Powell will testify Wednesday to the House Financial Services Committee and on Thursday to the Senate Banking Committee as part of the Fed's semi-annual monetary report to Congress.

Investors, as tracked by the CME Group, have assigned a 100% likelihood to a rate cut when the Fed meets in three weeks. Until very recently, the chance of a modest quarter-point cut was put at 70% and a steep half-point cut at 30%. The Fed's key rate, which influences many consumer and business loans, now stands in a range of 2.25% to 2.5%. Investors still see a 100% likelihood of a rate cut this month. But nearly all now foresee only a quarter-point move.

That change reflects two developments. Trump and Chinese President Xi Jinping declared a truce last month in what had threatened to become an escalating U.S.-China trade war and agreed to resume talks toward a deal that would meet the administration's demands to better protect U.S. technology.

That step eased fears that Trump would extend punitive tariffs to an additional $300 billion in Chinese goods, in the process inviting retaliation from Beijing on American exports and likely weakening both nations' economies.

And last week, the government reported that after a tepid job gain in May, U.S. employers sharply stepped up their hiring in June, an indication of the economy's durability.

Powell is certain to be questioned by lawmakers about these and other developments and about his view of the overall economy. No one expects him to state directly whether the Fed is ready to cut rates. But he may choose to send some such signal nevertheless.

One wild card in the Fed's decision-making has been Trump's highly unusual public pressure on the central bank to cut rates sharply. The president has repeatedly accused Powell and the Fed of keeping credit too tight for too long and of thereby holding back the economy and the stock market. Trump's attacks have raised alarms that he is undermining the Fed's long-recognized independence from political pressure.

Some economists have suggested that if the Fed surprises the markets late this month by choosing not to cut rates, it might be because Powell and other Fed policymakers don't want to be seen as having caved to Trump's relentless pressure.

On Sunday, Trump asserted that if the Fed "knew what it was doing," it would cut rates. That accusation followed his contention Friday that the central bank "doesn't have a clue" and is "our most difficult problem."

Trump has insisted that he has the authority to either fire Powell or demote him from the chairman's job — something that most outside experts dispute. On Tuesday, Lawrence Kudlow, head of the president's National Economic Council, said on CNBC that "there is no effort to remove him."

Kudlow added: "I will say that unequivocally at the present time. Yes, he's safe."

Asked Tuesday about Powell's status, White House counselor Kellyanne Conway told reporters that Trump has made clear his unhappiness with the Fed's rate policies and believes "he has the power to fire Jay Powell, but he hasn't done that. He's not doing that."

For insight into Trump's thinking about the Fed, Conway urged reporters to focus on Trump's announcement last week of his two latest candidates for seats on the seven-member Fed board: Judy Shelton, an outspoken conservative economist, and Christopher Waller, research director at the Fed's St. Louis regional bank. Both are regarded as highly likely to support Trump's drive to lower rates.

AP White House reporter Darlene Superville contributed to this report.

The Federal Reserve must move faster than it has in the past to rein in high inflation, Chair Jerome Powell said Thursday, signaling that sharp interest rate increases are likely in the coming months, beginning at the Fed's next policy meeting in May.

In a panel discussion held by the International Monetary Fund during its spring meetings, Powell also suggested that “there's something in the idea of front-loading" aggressive rate hikes as the Fed grapples with inflation that has reached a four-decade high.

“So that does point in the direction of (a half-point rate increase) being on the table" for the Fed's policy meeting May 3-4, Powell said. Typically in the past, the Fed has raised its benchmark short-term rate by more modest quarter-point increments. When the Fed raises its rate, it often leads to higher borrowing costs for people and businesses, including those seeking to borrow to buy homes, cars and other costly goods.

FILE - President of the European Central Bank Christine Lagarde looks the Cyprus President Nicos Anastasiades during a press conference after their meeting at the Presidential Palace in the capital Nicosia, Cyprus, Wednesday, March 30, 2022. Lagarde could drop more hints Thursday, April 14, 2022 about when the bank will start raising interest rates, with pressure increasing to follow the United States, United Kingdom and other countries in taking a harder line to combat soaring consumer prices. (AP PhotoPetros Karadjias, File)

Wall Street investors already expect the Fed to raise its key rate by a half-point at its next three meetings, including those that will occur in June and July. Powell's comments Thursday underscored those expectations.

That would be the fastest tightening since 1994, when the Fed raised its rate by 1.25 percentage points over the course of three meetings.

By contrast, Christine Lagarde, president of European Central Bank, who took part in Thursday's discussion, sounded a much more cautious note. Inflation in the 19 countries that use the euro reached 7.5% last month, compared with a year earlier, the highest level since records began in 1997.

Yet Europe's economy faces a greater threat from Russia's invasion of Ukraine, which has sent food and particularly energy prices on the continent soaring and has weighed more on its economic growth than in the United States.

Lagarde said the ECB, at its next meeting in June, would decide when to end its program of bond purchases, which are intended to lower long-term interest rates. The Fed completed a similar effort in March. The ECB has set the July-September quarter as a target to stop buying bonds but hasn't been more specific.

One reason for Lagarde's caution, she said, is that about half of Europe's inflation is driven by high energy prices. Typically, interest rate policies can do little about such supply shocks.

“Our economies are moving at a different pace,” Lagarde said, referring to Europe and the United States, where growth has been faster. “Our inflation is fed by different components.”