Asian shares mostly higher ahead of Fed chief testimony

Marco Green
July 11, 2019

Delivering the Fed's semi-annual monetary report to Congress, Powell sent the strongest signal yet that the central bank is ready to cut interest rates for the first time in a decade, possibly as soon as the July meeting.

Wednesday's testimony comes as Powell and the Fed face harsh criticism from President Donald Trump, who last weekend called the agency "our most hard problem" and said its inaction has stifled the USA economy.

Delivering the central bank's semiannual report to Congress, Powell said in prepared remarks that since Fed officials met last month, "uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook". "But we don't have a Fed that knows what they're doing".

Powell made no mention of the president's criticism in his prepared testimony, but he did thank Congress for the "independence" it has given the central bank to operate. "To me, it all depends on where you look in the economy. So they figure keep trying this until something happens".

The S&P 500 index of financial shares including banks, which tend to benefit in a higher interest rate environment, retreated 0.5% after Powell's comments. The yield on the 10-year Treasury note fell slightly 2.046%, and the yield on the 2-year slipped to 2.205%. 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.

Mr Powell, in written testimony ahead of his appearance at the House of Representatives Financial Services Committee, said he expected continued U.S. growth. Traders will be listening to the exchanges Powell has with lawmakers on Wednesday and Thursday for hints about the Fed's next move on interest rates. Traders should appreciate the idiosyncratic way interest rate markets are now discounting Fed rate cuts: the rate cuts are extremely frontloaded.

In a series of comments and tweets the USA president has accused the Fed of unnecessarily slowing the economy by not cutting rates.

"It's what the market wanted to hear", said J.J. Kinahan, chief market strategist at TD Ameritrade in Chicago. And he must do this all without admitting that the Fed misread the economy when it hiked rates a year ago.

This was despite last week's strong USA jobs figures and an easing of trade tensions with China.

The cooling in United States rate fever has seen bonds give back just a little of their huge rally, with yields on two-year Treasuries rising to 1.917 per cent from the recent trough of 1.696 per cent.

Last month Powell indicated that the Fed would carefully study the Facebook plan to create a global virtual currency which aims to lower transaction costs and bring more services to people without access to the banking system.

In late 2017, Trump nominated the Powell, an investment banker, to succeed Janet Yellen as chair of the Fed, the world's most powerful central bank.

Fed staff concluded the rise in world tariffs had a likely "material" impact on the slowdown in global trade past year, and that "uncertainty surrounding trade policy could be leading firms to delay investment decisions and reduce capital expenditures".

Other reports by Click Lancashire

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