Fed upsets market's hopes for rate cut

After listening to Federal Reserve Chairman Jerome Powell assert the central bank's independence on Tuesday, the stock market cut and ran.

"The Fed is insulated from short-term political pressures — what is often referred to as our 'independence,'" Powell said in a speech at the Council on Foreign Relations in New York.

Of the three major US stock indices, the Nasdaq Composite dropped the most percentage-wise, falling 121 points or 1.51 percent to 7885. The S&P 500 was down 28 points to 2917, or 0.95 percent. The Dow Jones Industrial Average lost 179 points, or 0.67 percent to 26,548.

US President Donald Trump, who has said that he has the authority to demote Powell, said on Twitter on Monday that the Fed "doesn't know what it is doing," adding that it "raised rates far too fast" and "blew it" given low inflation and slowing global growth.

Trump believes the dollar is too strong, and the euro too weak, and the situation could be eased if the Fed cut rates, an administration official said.

But it wasn't all gloomy for rate-cut hopefuls — Powell said he and his colleagues are "grappling" with whether risks to the economy warrant a rate cut.

While Powell didn't specifically mention the US-China trade dispute, he did express concern about "crosscurrents" threatening the economic outlook, chief among them the trade issue's impact on the global economy.

"Although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market," he said in the speech. "Along with this favorable picture, we have been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth.

"When the FOMC met at the start of May, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate. Since then, the picture has changed," he said. "The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy."

Trump and Chinese President Xi Jinping are scheduled to meet later this week at the G20 Leaders Summit in Osaka, Japan. The outcome of that meeting could come to bear on the Fed's next move.

Powell said the Fed's contacts in business and agriculture report "heightened concerns over trade developments".

"These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. For example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year," he said.

But on the flip side, St. Louis Fed President James Bullard told Bloomberg Television he does not believe a cut of a half-percentage point (50 basis points) is warranted at the FOMC (Federal Open Market Committee) meeting in July, even though he was in favor of cutting rates last week.

"Powell gets all the headlines (and all the flak from the president), but it's St Louis Fed President James Bullard who has the most interesting voice at the moment," Kamal Khan, chief US editor at Investing.com, told China Daily.

"Bullard is the most dovish and the lone dissenter at last week's meeting. But he pretty much took a half-point cut off the table today — leaving the more bullish investors chagrined."

However, FedWatch shows a 70.8 percent change of a quarter-point cut and a 29.2 percent chance of a half-point cut on July 31, Jim Collins, chief executive officer of Excelsior Capital Partners in North Carolina, told China Daily.

"So the Fed has to cut on July 31 or these markets will crash. I think investors are looking for tone," Collins said. "Powell has been so dovish since December that he really leaves himself open for interpretation on the hawkish side, as he did today. He has no more wiggle room."

Reuters contributed to this story.