Powell on stepping down if Trump asked: 'My answer would be no'

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Fed Chair Powell said that "uncertainties since [the] June FOMC continue to dim [the economic] outlook", a not-so-subtle hint that the US-China trade war is hurting the economy.

"The line "our baseline outlook is for economic growth to remain solid, labour markets to stay strong and inflation to move back up over time" to 2%, suggests to us that any rate cuts will be precautionary and tentative", says James Knightley, chief worldwide economist at ING Group.

Some surveys have suggested the manufacturing sector is creaking under stress from the trade war with China, with USA firms contending not only with the cost of President Trump's import tariffs but also a deterioration of the global economy that is threatening domestic and worldwide demand.

CPI and PPI are not the Fed's preferred measures of underlying inflation in the US economy - that designation is reserved for the core personal consumptions expenditures (PCE) price index, released by the Bureau of Economic Analysis (BEA).

USA stock index futures gained early on Wednesday, turning positive after Powell's remarks were released, while the United States dollar fell against a basket of other currencies.

Government bond yields dipped, with two-year US Treasuries falling below 1.87 percent, from around 1.93 percent. He will testify again on Thursday before the US Senate Banking Committee.

Investors expect the Fed will cut its benchmark rate, now in a range between 2.25% and 2.5%, by a quarter percentage point at its 30-31 July meeting.

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"It's unlikely the Fed will be swayed from lowering interest rates as an insurance policy against future economic weakness", said Matthew Eidinger, FX trader at Cambridge Global Payments in Montreal. Furthermore, investors solidified their expectations for at least a quarter-point rate cut at the end of this month.

US economic fundamentals may not have changed much in the days that followed Trump's May 30 comments on Twitter threatening to impose tariffs on Mexico unless the country met his demands for tougher controls on immigrants crossing the US-Mexico border.

"The Fed has never disappointed a market with such strong expectations of action", Joseph Lavorgna, chief economist for the Americas at Natixis, wrote in a recent analysis. Rates remained close to zero for years.

The only question left seems to be: How low will borrowing costs go this month? The market also began to price a 58% chance of a 50-basis point cut.

Last week, the Labor Department reported stronger-than-expected job growth in June.

"If there was any doubt that the data was really compelling, especially the strong USA nonfarm payrolls report last week, I think we had our answer yesterday, with Powell's pretty strong argument for easing as soon as July", said Mazen Issa, senior FX strategist at TD Securities in NY.

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