Powell testimony, Fed meeting highlight case for 'insurance'

WASHINGTON (Reuters) - A confidence shock driven partly by the U.S. trade war is at the center of an increasingly persuasive argument for Federal Reserve policymakers seriously considering cutting rates for the first time in a decade.

Federal Reserve Chairman Jerome Powell on Wednesday set the stage for the rate cut this month, as records from policymakers’ latest meeting showed increasing fear that a U.S.-China trade war that has done little to directly restrain growth is indirectly causing businesses to hold back on buying equipment, giving workers a raise and hiking their prices.

Those factors have conspired to pose a serious risk of ending the economic expansion by pushing growth and inflation lower. The Fed is getting closer to lower rates to take out “insurance” that does not happen.

Powell used an appearance here before his congressional overseers on Wednesday to confirm that the U.S. economy is still under threat from disappointing factory activity, tame inflation and a simmering trade war.

Those are the kinds of uncertainties that many policymakers called out here as suggesting the need for a rate cut in the near term, according to records from the Feds rate-setting meeting, which were released shortly after Powell concluded several hours of testimony before the U.S. House of Representatives Financial Services Committee.

“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 U.S. outlook,” Powell said.

At that June 18-19 meeting, some Fed policymakers worried that they may need act to lift inflation that is failing to meet the U.S. central bank’s 2% annual target and to combat a pervasive pessimism among corporations that they see holding back business investment. Lower rates could “cushion the effects” of shocks from the trade war, according to the minutes’ summary of the case for a cut.

“Powell’s really making the case that an insurance rate cut is important so July is looking much more likely despite the fact we had a pretty good jobs report,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

U.S. stocks traded higher, with the S&P 500 briefly crossing the 3,000-point mark for the first time. Short-term bond yields fell, and the U.S. dollar fell against a basket of other currencies.

Powell and the meeting records both shed light on what is concerning the Fed about an economy they concede is still likely to grow.