The Federal Reserve is preparing to cut interest rates for the first time in a decade later this month as it sees a cooling global economy and no sign of overheating in the jobs market at home.
Since the US central bank opened the doors to lower borrowing costs last month, plenty more data has arrived to back up the view that “manufacturing, trade and investment are weak all around the world, Fed chairman Jerome Powell told the US Congress at a hearing last week.
While Powell did not specifically state that a Fed rate cut could be coming at this month’s meeting, investors have taken his two days of testimony as strong evidence of that.
In his Senate appearance, Powell elaborated on the Fed’s concerns about persistently low inflation as a reason that there is growing support for rate cuts, citing the problems Japan and Europe are facing in fighting chronically low inflation.
Powell received support from lawmakers in the House and the Senate for his efforts to maintain the Fed’s independence from political pressure.
The Fed seeks to keep prices rising at an annual rate of 2%, but it has lagged below that level for most of the current expansion. This year it has fallen farther below that goal.
Meanwhile, trade tensions and slowing global growth are continuing to be a drag on the US economy, signalling the central bank could cut interest rates this month.
A rate reduction would come after months of constant pressure by President Donald Trump on the central bank to ease its monetary policy to keep the country’s record economic expansion going.
Investors have been anticipating that the Fed would move ahead with a cut later this month after stating for months it would stick to a patient approach. In June, the Fed held rates steady but raised the prospect for two potential rates cuts this year, as policy makers continue to weigh the right time to act amid concerns over Trump’s trade policies.
They have also been eager for an additional signal from the chairman on the Fed’s plan following a rosy jobs report last week that showed the economy added 224,000 jobs, a sharp rebound from a dip in May.
The Fed’s policy rate is currently in a range of 2.25-2.5%, and the bank’s last rate increase occurred in December, a hike that has been fiercely criticised by President Donald Trump.
Financial futures markets indicate a 100% certainty among investors and traders that the Fed will lower that rate by at least a quarter percentage point this month.
Powell held his ground that soft inflation, which has persistently failed to rise to the Fed’s 2% target, presents a significant risk the Fed must guard against.
On July 11, the US government reported that underlying consumer price inflation ticked up at its briskest pace in nearly a year and a half last month and the labour market shows no signs of weakening.
The Fed, however, tracks a different measure of price pressures, and that has drifted well below target.
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