The major domestic equity indexes closed higher on Wednesday, as the S&P 500 index briefly crossed the 3,000-point mark for the first time, due in no small part to remarks by Federal Reserve Chairman Jerome Powell reassured investors about the potential for an interest rate cut later this month.
The Dow also hit an intraday record while the Nasdaq closed at an all-time high following the release of prepared remarks for Powell’s testimony before the House of Representatives Financial Services Committee. Powell said the central bank stands ready to “act as appropriate” to support record U.S. economic growth.
The S&P 500 breached the 3,000-mark just after the opening but ended slightly below that level at 2,993.07 points. Some believe the breach may boost confidence in a market that has been breaking to record highs this year. Others were less certain.
Amazon, Microsoft and Apple were among the biggest lifts to the indexes.
In his testimony, the first installment of two days on Capitol Hill this week, Powell pointed to “broad” global weakness that was clouding the U.S. economic outlook amid uncertainty about the fallout from the Trump administration’s trade dispute with China and other key economies.
Stocks briefly added to gains following minutes from the last meeting of Fed policymakers that showed many Fed officials thought more stimulus would be needed soon if risks to the economy did not let up.
The S&P 500 index of financial shares including banks, which tend to benefit in a higher interest rate environment, retreated 0.5% after Powell’s comments.
One theory is that to a considerable degree this year’s equity gains can be attributed to a change in Fed’s more dovish outlook on interest rate policy.
Approximately 6.38 billion shares changed hands on the major domestic equity exchanges on Wednesday, as compared to the 6.72 billion share average over the past 20 trading days.
Powell Implies Rate Cut
Fed Chairman Jerome Powell on Wednesday set the stage for the first interest rate cut in a decade later this month, pledging to ‘act as appropriate’ to defend an economic expansion threatened by trade disputes and a global slowdown.
In testimony to a congressional committee, Powell pointed to “broad” global weakness that was clouding our economic outlook amid uncertainty about the fallout from the Trump administration’s trade conflict with China and other nations.
Though the Labor Department reported strong job growth for June, other major economies’ “data have continued to disappoint. That is very broad across Europe and around Asia, and that continues to weigh,” Powell said.
“Manufacturing, trade and investment are weak all around the world … We have agreed to begin (trade) discussions again with China, and that is a constructive step. It doesn’t remove the uncertainty.”
To the suggestion that the current low U.S. unemployment rate could lead to a breakout of inflation, Powell noted that the overall pace of price increases remains “muted” and wage gains remain modest, signs the Fed could reduce rates without risk of an overheating economy.
“We don’t have any evidence for calling this a hot labor market,” Powell told the U.S. House of Representatives Financial Services Committee. “To call something hot we need to see some heat.”
The hearing, part of the Fed chief’s semi-annual testimony on monetary policy to Congress, took place against the backdrop of Trump’s frequent criticism of the Fed and the White House’s demands that the central bank lower rates.
Powell, chosen by Trump to run the Fed but now out of his good graces, has worked hard to build relations among lawmakers, and even on a Democratic-controlled committee won plaudits and encouragement to stay on the job.
Asked by Representative Maxine Waters, who chairs the committee, if he would “pack up and leave” if the president demanded it, Powell replied with a curt “no ma’am … The law clearly gives me a four-year term and I fully intend to serve it.”
In prepared remarks released before the hearing, Powell contrasted the Fed’s “baseline outlook” of continued growth against a considerable set of risks – including persistently weak inflation, a slowdown in other major economies, and a downturn in business investment driven by trade risks.
Fed officials at their June policy meeting signaled those concerns might warrant lower rates, and “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 outlook,” Powell said.
“Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture reported heightened concerns over trade developments,” Powell said, noting that business investment, an important component of economic growth, “seems to have slowed notably” in recent months.
The Fed, which hiked rates four times last year, has kept its current benchmark overnight interest rate in a range of between 2.25% and 2.50% since December.
Earlier rounds of U.S. tariffs on trading partners including China had been dismissed by the Fed as of little macroeconomic importance, with central bankers in early May still anticipating its policy rate would remain unchanged for the rest of the year.
By contrast, the higher tariffs announced against China in early May, a rising sense the world’s two largest economies might not be able to make a deal, and the tariff threat against Mexico added to a growing feeling that protectionism and higher tariffs were here to stay – at a cost to investment and growth.
Reducing rates at this point would be similar to the Fed’s efforts in the mid-1990s to nurse along a lengthy recovery rather than respond to a looming downturn, and “there’s no immediate need to move,” Philadelphia Fed President Patrick Harker said on Tuesday.
But Trump’s tweets about Mexico had a particularly unsettling impact, touching off enough volatility and doubt about the future that it pushed the Fed towards the very rate cuts Trump has demanded for other reasons.
At the Fed’s last policy meeting in mid-June, eight of the 17 policymakers saw the need for at least one rate cut by year’s end, and Powell told reporters afterwards many others were leaning in that direction. The minutes may show how strong that sentiment has become.
In the Fed’s monetary policy report issued last week ahead of Powell’s testimony, the trade war received its own analysis, a sign of the attention it is getting within the central bank.
Powell will testify again on Thursday before the Senate Banking Committee.
Minutes of June 18-19 Fed Meeting
Many Fed members at their last meeting thought more stimulus would be needed soon if risks to the U.S. economy did not let up, and several others leaned in that direction, records from the meeting showed.
In their June 18-19 meeting, which for the first time this year introduced the near-term possibility that the Fed might cut rates, multiple members indicated that rates should come down to “cushion the effects” of the trade war and to firm up inflation that is failing to meet the central bank’s 2%-a-year target, according to the minutes from that meeting released on Wednesday.
But they did not convince all their colleagues.
“Some” thought “there was not yet a strong case for a rate cut from current levels” and wanted to gather more information before agreeing to a policy that Trump has demanded, and which markets now see as an almost certainty.
At the meeting members anguished over the possibility that the longest economic recovery in our history might be derailed because of slower global growth and a Trump administration trade war with China.
They held their target interest rate steady in a range of between 2.25% and 2.5% but dropped promises to be “patient” before changing rates.
Only “a couple” participants thought an immediate cut was necessary at the meeting, but all the members “generally agreed” that the downside risks to the economy had “risen materially,” according to the meeting records.
After the meeting, China and the United States agreed to resume trade talks and Washington promised no new tariffs.
However, in recent days Fed Chairman Jerome Powell has said the uncertainties around trade could still be weighing on business confidence and investment, potentially requiring action.
The Fed also debated the usefulness and risks that might come with potential new tools to control interest rates.
One change, introducing what is known as a standing repurchase facility, would let financial institutions exchange Treasuries for reserves they keep at the central bank and could ease pressures in short-term borrowing markets that the Fed hopes to influence.
No decisions were made.