Major U.S. stock indexes jumped on Wednesday after Federal Reserve Chairman Jerome Powell highlighted weakening U.S. economic indicators in congressional testimony, boosting the odds of an interest rate cut later this month.
The central bank’s monetary policy committee all but promised in June that its next adjustment to interest rates would be a cut, taking rates below the range of 2.25% to 2.5% achieved after nine increases over the past three years.
Many committee participants believed at the time that a reduction might be needed soon, Powell told the House Financial Services Committee, and since then “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
The blue-chip Dow Jones Industrial Average climbed 0.29% at the close of New York trading, while the broader S&P 500 added 0.51% and the tech-heavy Nasdaq composite rose 0.75%.
Consumer spending has bounced back from a weak start to the year, but gains in business investment have slowed notably and inflation remains below the 2% target the Fed believes would indicate stable growth, Powell said during the first of two days of testimony. “We’re carefully monitoring these developments.”
Powell’s remarks are notable for doing “nothing to dissuade investors from their all-in bets that an interest rate cut is coming,” said Mark Hamrick, senior economic analyst for Bankrate.com. “While he won’t necessarily say it, Powell understands that if investors were making the wrong bet on rates, there would be the potential for a nasty downdraft in stock prices.”
Trading in interest-rate futures reflected a jump to 16% in the chances of a 50 basis-point cut at the Fed’s meeting on July 31, twice the typical size, along with an 84% chance of the Fed trimming rates at least 25 basis points.
“Today’s Congressional testimony increases our confidence in our forecast for at least a 25 basis-point cut” in July, said Jonathan Millar, an economist with British lender Barclays Plc, and “seemingly raises the likelihood of an even more aggressive rate move.”
A rate reduction would buoy markets that have chafed under President Trump’s trade wars, and grant the chief executive an edge he has long sought.
Business leaders and economists alike have warned of growing fallout from Trump’s tariffs on $250 billion of Chinese imports, along with threats to impose them on all goods from the world’s second-largest economy as well as to add levies to cars and car parts.
The White House has also tacked charges onto washing machines, solar panels, steel and aluminum and hinted at duties on imports from Vietnam and India.
