Wall Street reaps gains as Powell's dovish testimony, Fed's minutes fuel bets on rate cut

Source: Xinhua| 2019-07-11 13:47:28|Editor: Li Xia
Video PlayerClose

by Xinhua writer Ma Qian

NEW YORK, June 10 (Xinhua) -- The U.S. Federal Reserve held the key to market rallies on Wednesday, as investors made a strengthening case for interest rate cuts later this month based on Fed chair's dovish testimony and the central bank's latest meeting minutes.

The three major indexes notched solid gains throughout the day, with the Dow Jones Industrial Average rising 76.71 points, or 0.29 percent, to settle at 26,860.20. The S&P 500 rallied 13.44 points, or 0.45 percent, to 2,993.07. The Nasdaq Composite Index increased 60.80 points, or 0.75 percent, to 8,202.53.


Fed chair Jerome Powell's testimony once propelled the overall stocks to hit record highs during morning sessions, with the S&P 500 climbing above 3,000 points for the first time ever, and the Nasdaq closing at an all-time high.

In front of the U.S. House of Representatives Financial Services Committee, Powell said the central bank is prepared to "act as appropriate" to prop up economic expansion and underpin inflation amid a raft of risks and uncertainties, including weak inflation, slower global growth, and a pullback in business investment due to lingering U.S.-China trade frictions.

"Since our May meeting, however, these crosscurrents have reemerged, creating greater uncertainty," he said. "Many FOMC (Federal Open Market Committee) participants saw that the case for a somewhat more accommodative monetary policy had strengthened."

"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 U.S. economic outlook. Inflation pressures remain muted," Powell noted.

"In other words, the Fed is taking out insurance with hopes of extending the recovery and ultimately gaining policy space," said a Bank of America (BofA) Merrill Lynch global research report on Wednesday, adding that the market has acted "as if the Fed has already cut."

The FOMC, the Fed's policy-making arm, maintained the target range for the federal funds rate at 2.25 to 2.5 percent in the first half of this year.

"We now expect a 25bp (basis point) cut at the July 31st meeting followed by two more cuts at the next two meetings," said the investment bank's report, citing Powell's dovish testimony that hinted "strongly at an upcoming cut."

"If the Fed does not deliver, financial conditions will tighten, creating a headwind for the economy," the report added.

From his perspective, Peter Tuchman, a seasoned trader at Quattro Securities, also anticipated the Fed to lower its benchmark interest rate's target range "sooner than later" by either 25 or 50 bps.

"It seems like it's a done deal ...I think if they do not cut it, the market will be deeply disappointed," Tuchman told Xinhua on Wednesday.

He also mentioned that to buffer the U.S. economy from potential inflation, the Fed believed that "lowering interest rates at this time is what seems to be in the cards."

Inflation has been running below the FOMC's symmetric 2 percent objective. After running close to the 2 percent objective over much of last year, overall consumer price inflation, measured by the 12-month change in the price index for personal consumption expenditures (PCE), declined earlier this year and stood at 1.5 percent in May, Powell elaborated in his testimony.

"The hope is that the Fed's cuts will be able to boost inflation expectations, prompting consumers to be willing to spend more (especially in the context of stronger wage growth) and give businesses greater pricing power," the BofA Merrill Lynch report stressed.


June's surprisingly robust jobs report released on July 5 has scaled back expectations for potential aggressive rate cuts and dampened stocks' gains over the past few days.

However, Powell's remarks and the Fed's minutes added to market bets on a greater cutting range, as market participants have been convinced that a rate cut would become a certainty at the Fed's policy meeting on July 30-31.

Probability for a 50-bp cut picked up to 26.6 percent, while the remaining 73.4 percent fell on a 25-bp cut, according to CME Group's FedWatch tool on Wednesday.

Tuchman also believes that the Fed's intention to lower rates came primarily out of its attempts to rebuff inflation and shore up global growth, as the stock market has been trading at the highs and the overall U.S. economic conditions appear decent.

"I think there's some fear of global growth slowdown, some fear of inflation, and some fear of manufacturing activity slowing down," said the experienced trader.

"They (Fed officials) seem to think that fear about manufacturing slowdown in the U.S., (and) people's fear about global slowdown in economies other than our own will affect the U.S. markets," he added.

In his answers to lawmakers at Congress, Powell said the strong jobs report would not change his views on rate cut. That indicated that the Fed has been focusing on the weaker global data, instead of the better domestic data, to assess its easing policy, according to BofA Merrill Lynch's report.

"It is because Chair Powell sees major downside risks from outside of the U.S." the report noted. "The global data continue to weaken ... Meanwhile trade uncertainties are unlikely to abate anytime soon and business investment has slowed down considerably across the globe."

Fed officials also supported a near-term rate cut, which "could help cushion the effects of possible future adverse shocks to the economy," according to FOMC's minutes of its meeting on June 18-19, which was released on Wednesday afternoon.

"Participants generally agreed that downside risks to the outlook for economic activity had risen materially since their May meeting, particularly those associated with ongoing trade negotiations and slowing economic growth abroad," said the minutes.