Federal Reserve Chairman Jerome Powell told Congress Wednesday that the U.S. economy looks "solid" but that he sees risks from an apparent slowdown in the global economy and an inflation rate that has stayed stubbornly below the central bank's 2% target.
The remarks were seen by investors as an indication that the central bank is leaning toward cutting official U.S. interest rates at a meeting later this month, in what would be the first such reduction since the financial crisis and ensuing recession of 2008-2009.
Powell also cited the ongoing threat of an escalation of President Donald Trump's trade dispute with China, despite a recent truce between the nations that forestalls the imposition of further tariffs.
"The bottom line for me is that the uncertainties for global trade continue to weigh on the outlook," Powell said under questioning, while "inflation continues to be muted."
The comments, made during semiannual testimony before the House of Representatives' committee on financial services, come at a time of intense speculation among traders and economists over whether the central bank will move later this month to cut interest rates from their current range of 2.25% to 2.5%.
Even top Wall Street firms are split on the call: Morgan Stanley analysts expect an interest-rate cut of 0.5 percentage point at the next Fed meeting, scheduled for Jan. 30-31, while Bank of America economists have written that they expect no change, since it doesn't seem warranted.
Trump has repeatedly criticized Powell, his own appointee to the post, for setting interest rates too high, blaming the Federal Reserve for stymieing U.S. economic growth and jobs creation.
U.S. gross domestic product this year is expected to increase by about 2.5%, below the 3% long-term pace that Trump promised when he campaigned in late 2017 for a $1.5 trillion tax-cut package, which has helped to swell annual budget deficits and pushed the national debt to $22 trillion.
Powell, when pressed during the hearing by Maxine Waters, the California Democrat who heads the House committee, said he would refuse to leave office if Trump tried to fire him.
"No ma'am," Powell said. "The law clearly gives me a four-year term, and I fully intend to serve it."
Some economists are perplexed by the Fed's apparent's openness to cut rates, since the central bank typically only does so when unemployment is surging, inflation is sagging or a recession is looming. Inflation is running below the Fed's 2% target, but recent signs have indicated that an uptick is imminent, and in the meantime the strength of the economy has been reflected in U.S. stocks, which hit record highs as recently as last week.
"Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the committee's 2% objective," Powell said in prepared remarks. "However, uncertainties about the outlook have increased in recent months."
The market for futures contracts on federal funds shows that most traders currently expect the central bank to cut official interest rates by 0.25 percentage point at the meeting later this month.
One issue is that interest rates are typically much higher at the peak of an economic cycle than they are currently -- partly a consequence of the depth of the 2008 financial crisis. So if the Fed were to cut rates now, preemptively, then policymakers would have less room to cut rates later if a recession actually materialized.
"We see that that road is hard to get off of," Powell said.