Federal Reserve Chairman Jerome Powell holds a press conference following a two day Federal Open Market Committee policy meeting in Washington, January 30, 2019. Leah Millis | Reuters

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."

July Fed meeting

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."

Trump factor

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.

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