Federal Reserve Chair Jerome Powell delivered his semiannual testimony to Congress. In it he confirmed that crosscurrents and increased uncertainty continue to weigh on the economic outlook and that inflation remains muted.

The discussion of the baseline outlook was couched in concerns for downside risks. Namely, that weakness in foreign economies could shift to the U.S., as well as concerns over numerous event risks including “trade developments, the federal debt ceiling, and Brexit.”

Comments on the long-term challenges facing the economy also hewed on the dovish side. In particular, labor force participation for those in their prime working years was noted as low relative to other countries. This suggests that the Fed sees more room to run in the labor market.

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Following his testimony, Chair Powell will answer questions from the U.S. House Committee on Financial Services.

Key Implications

The Fed Chair’s speech all but guaranteed that the Federal Open Market Committee will cut rates at it its meeting in late July. This is not a surprise, but the clarity of his comments on this point was perhaps more than expected. Yields have edged lower across the curve on the publishing of his remarks.

Following the July rate cut, the outlook for additional cuts is more uncertain. On the one hand it seems unlikely that all of the possible event risks work out in a way that removes lingering uncertainty from the economic outlook. But, on the other hand, domestic spending data have held up well, and the American economy has, in the past, proven itself resilient to outside shocks. All told, we continue to anticipate at least one more cut in the latter half of this year, but expect that the economic data will hold up, limiting the case for further “insurance” cuts.

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