Fed chief to testify on rate cuts

US inflation is low, and the June jobs report that came out last week was strong, suggesting an economy with no major problems ahead.

Yet, many expect the Federal Reserve to cut interest rates a quarter of a point when it meets July 30-31.

Analysts, pundits and politicians are wondering why.

Federal Reserve Chairman Jerome Powell will give his views on the need for an interest rate cut — or the importance of holding rates steady — when he testifies on Wednesday before the House Financial Services Committee and Thursday before the Senate Banking Committee.

Some believe the slowing rate of growth, dipping to an estimated 1.3 percent in the second quarter of 2019 from an annualized rate of 3.1 percent in the first quarter, calls for a booster shot.

Others foresee trouble ahead from the ongoing US-China trade dispute because tariffs raise prices and have the potential to disrupt supply chains, tossing production and retail sales into turmoil.

That would be a serious problem because consumer spending accounts for about two-thirds of the US gross domestic product, the monetary value of all goods sold and services provided.

US President Donald Trump argues that the current rate of 2.25-2.50 percent limits economic growth. "If we had a Fed that would lower interest rates, we would be like a rocket ship. We don't have a Fed that knows what it's doing," Trump said last week.

A cut reduces bond yields, making stocks more attractive to investors. A cut also may reduce credit card and home mortgage rates, boosting retail and home sales.

A cut would be bad news for small savers, however, because interest earned on deposits will decline.

The market was mixed Tuesday. The Dow Jones Industrial Average closed down 22.65 points, or 0.08 percent, but the S&P 500 and Nasdaq were up. All three indices declined Monday.

Larry Kudlow, White House economic adviser, on Tuesday said Powell's job is safe "at the present time".

The Federal Reserve is an independent governmental agency, and its actions do not have to be approved by Trump or anyone else, and as

Fed spokeswoman Michelle Smith said in June: "Under the law, a Federal Reserve Board chair can only be removed for cause."

But Trump's comments may create a problem for Powell. If he cuts rates he may be seen as caving in to Trump's demands and thereby eroding the independence of the Fed.

Trump needs a strong economy when he seeks re-election in 2020. Since 1900, about 80 percent of incumbent presidents have been re-elected. Since Franklin Delano Roosevelt won the White House in 1932, every incumbent president who campaigned with a strong economy has been re-elected. President Jimmy Carter, a Democrat, lost his bid for re-election in 1980 because unemployment reached 7.15 percent and inflation was 12.67 — a toxic combination known as "stagflation" that strangled the economy.

By contrast, the June 2019 jobs report showed that US employers added 224,000 non-farm jobs, up from 72,000 created in May. It was the 105th consecutive month employment has increased, the US Labor Department reported. The annual inflation rate was 1.8 percent for the 12 months ended in May, below the Fed's target of 2 percent. The Labor Department will release its next report on Thursday and provide the inflation rate for the 12 months ended June 2019.

The June job numbers are the first full-month look at the labor market since Trump hiked tariffs on May 10, to 25 percent from 10 percent on Chinese Imports valued at $200 billion. The labor force participation rate, the share of working-age adults employed or looking for a job, rose to 62.0 percent from 62.8 percent in May. The unemployment rate edged up to 3.7 percent in June because more Americans returned to the labor force to look for a job.

In June, Goldman Sachs analyst Jan Hatzius correctly forecast that the Fed would hold rates unchanged while being open to possible cuts later this year. The Federal Open Market Committee now projects at least one cut by December.

"Most of the dovish Fedspeak over the past several weeks has emphasized the increased uncertainty (especially with regard to trade policy) around a fairly optimistic central case as a reason for potential rate cuts," he said in a research note to investors. "But while trade uncertainty has not gone away, the decision by presidents Trump and Xi (Jinping) to return to the negotiating table and suspend the next tariff increase has reduced it, at least in the near term."