When Federal Reserve Chairman Jerome Powell testifies before Congress on Wednesday and Thursday, he is expected to talk about slowing economic activity and increased risks, showing that the Fed is ready to cut interest rates as needed.
But Powell is also likely to keep the markets — and the White House — guessing about how soon and how deep the Fed intends to trim rates, when it meets at the end of July. The prevailing view, priced into the futures market, is for a 100% chance of a quarter point rate cut July 31.
"There is no part of what he has to do over the next two days that does not resemble walking a tightrope over Niagara Falls," said Julian Emanuel, chief equity and derivatives strategist at BTIG.
Just the divergence in market views could make for volatile trading, when Powell appears before the House Financial Services Committee Wednesday morning and at Senate Banking on Thursday. Powell laid out the case for rate cuts when he spoke after the last Fed meeting, stressing that the global economy and trade wars were risks to U.S. growth.
"He's going to do his best to play both sides. If you're testifying in front of Congress, you don't want to tell Congress: 'Things are slowing down, and I'm going to cut, cut, cut,'" said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "He's going to tell Congress the economy's good, but there's some pockets, and he'll play up the idea of an insurance cut. Congress is his boss. You don't want to tell the boss you're behind the curve, and the December rate hike was a mistake."
Last Friday's surprisingly strong report of 224,000 jobs added in June has raised some doubts about whether the Fed would see a need to make a half-percentage point cut in July, as some had expected, but the market remains convinced the central bank will slice rates by at least a quarter point.
Emanuel, however, said the Fed has leeway, and while he does ultimately expect a half-percentage point in cuts this year, the Fed may start in September instead of July.
Others, like Jim Caron, portfolio manager with Morgan Stanley Investment Management, see a half-percentage point rate cut coming as early as late July.
"My sense is that Powell is more concerned about global financial conditions (weak global PMIs, low global inflation, weakening growth everywhere) than he is pacified by a strong US labor market," Caron wrote in an email. "I know the market is pricing 25bps in July. I'm leaning toward 50bps but it's a close call. I think it's a closer call than the market is pricing."
More than other Fed chiefs, Powell has faced a barrage of public criticism from a president who disagrees with the way the Fed has been handling monetary policy. President Donald Trump has also reportedly looked into replacing the Fed chief, but Larry Kudlow, top White House economist, said Tuesday the president has no such plans for now.
Still, Congress is likely to home in on the theme of Fed independence.
"If he has to repeatedly assert his political independence in the Q and Q period, it's very difficult to see how that wouldn't come across as more hawkish than the market expects, given the president's insistence that monetary policy is too restrictive," said Emanuel.
Michael Arone, chief investment strategist at State Street Global Advisors, said the Fed chief's comments could sound hawkish, but the minutes from its last meeting, expected Wednesday afternoon, could be dovish.
"The markets are going to see there was healthy debate about whether they should have cut rates in June," he said, noting there was a dissent from St. Louis Fed President James Bullard.
Arone said Powell's testimony could disappoint investors who were hoping for clarity on the timing of interest rate cuts, and how much the Fed would be willing to move the fed funds target rate range, now at 2.25% to 2.50%.
"With the strong jobs report and stock market at all-time highs, I think Chair Powell and the Fed will want to keep their options open. He won't want to be seen giving into political pressure," said Arone.
The Fed has also faced the wrath of financial markets, which reacted violently to its last rate increase in December, and were later soothed when the Fed paused its hiking policy. The Fed has now pivoted from neutral to a dovish policy, or a rate-cutting stance.
"The bond market is set. It priced in a full rate cut. If he deviates from that, that will be the fireworks. If he reaffirms the cut, then walks back the possibility of a September one, the markets need to readjust. That would be his way of saying, this is not the beginning of a rate-cutting cycle, it's just some tweaking," Boockvar said.
Ralph Axel, senior U.S. rate strategist at Bank of America Merrill Lynch, said he expects a quarter-point cut in July. He also expects to hear Powell repeat the reasons for the cut that were mentioned in the Fed's monetary policy report released last week, ahead of the chairman's testimony.
"The key paragraphs are that economic activity has become more downbeat, and the used that word — downbeat...That is a new stance, more downbeat data, more uncertain outlook," he said, adding that with disappointing inflation data it's easy to see a Fed rate cut.
"He's not going to pre-commit to any policy action..If he wants to talk the market out of a July rate cut, he needs to do it this week," said Axel. But he said that is very unlikely because it would be inconsistent with recent Fed statements and its policy report.
"It is not entirely clear to me that after Thursday, we're going to have a much clearer picture," said Emanuel.
Congress is also likely to hear a new message from the Fed, one Powell has been voicing recently as the Fed pivoted from neutral to a rate-cutting posture.
"His new language is 'we stand ready to act as appropriate to sustain the expansion,'" said Axel. "That's his new mantra. That's his new tag line. It's so unlikely to me that he pushes back. It's pushing a huge boulder up the mountain to move the market off a July cut."
Axel said the Fed would not be swayed by the strength of job growth in June.
"There's a lot of noise and they don't want to get wrapped up in it," he said. "The six-month moving average of payrolls was 220,000, 230,000 jobs per month, and has now fallen to 171,000 per month. There's been a decline of the six-month moving average. That's part of the downbeat economic activity."