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Instant view - Powell: Fed stands ready to act 'as appropriate' to sustain expansion

Kitco News

(Reuters) - Concerns about trade policy and a weak global economy “continue to weigh on the U.S. economic outlook” and the Federal Reserve stands ready to “act as appropriate” to sustain a decade-long expansion, Fed Chairman Jerome Powell said on Wednesday in remarks that could bolster expectations of an interest rate cut later this month.

Story:

KEY POINTS:

** Powell says it appears trade uncertainties and concerns about global economy continue to weigh on U.S. economic outlook

** Powell repeats that Fed will act “as appropriate” to sustain economic growth

** Baseline outlook is for U.S. economic growth to remain solid, labor markets to stay strong and inflation to move back up to central bank’s 2% target - Powell

** Powell says there is a risk weak inflation will be even more persistent than Fed currently anticipates

** U.S. economic growth appears to have moderated in Q2; economic momentum appears to have slowed in some major foreign economies in recent months, Powell says

MARKET REACTION:

STOCKS: S&P 500 e-mini futures EScv1 reverse early weakness, last up 0.45%, pointing to higher Wall Street open

BONDS: U.S. Treasury yields fall; 2s US2YT=RR at 1.85%; 10s US10YT=RR at 2.0474%

FOREX: The U.S. dollar index .DXY extended losses and was last off 0.4%

COMMENTS:

MICHAEL POND, HEAD OF GLOBAL INFLATION-LINKED RESEARCH, BARCLAYS, NEW YORK

“The market is focused on the part of Powell’s testimony where he says “uncertainties continue.” And that led the market to think that uncertainty alone, rather than the incoming data, is enough to get them to move, likely 25 basis points, at the end of this month. And so were seeing a bit of a bull steepening in Treasuries, a rebound in equities, a bounce in breakevens, which is also being helped by the move up in oil futures overnight.”

“It does lead the market to think that the Fed is moving as an insurance cut. If the economy is deteriorating and the Fed is cutting, all they’re doing is offsetting weaker growth. But if growth is fine and they’re cutting, then that leads the market to think this is much more of an insurance cut, which could boost risk assets and that’s in part why we’re seeing a bounce in breakeven insurance rates.”

JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET CAPITAL MANAGEMENT, CHICAGO

“Fed funds futures had a 100% chance of a rate cut and it certainly looks like we are going to see a rate cut later this month. The jury is out, though, on the one full percentage point cut over the next 12 months, that still remains to be seen.

“Given that it was a 100% expectation, the best they could hope for was expectation, so I’m sure there was some lingering doubt among equity investors. When you see a 100% chance of anything, it causes some concern. Powell is setting it up, certainly for a July rate cut. To me, it all depends on where you look in the economy. But over the last decade, the Federal Reserve has been banging the inflation beehive with a baseball bat and the bees haven’t come out, so they figure keep trying this until something happens.”

Compiled by Alden Bentley

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