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Fed's Powell in No Rush to Cut Rates, But the Market Barely Flinched

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Federal Reserve Chairman Jerome Powell spoke in front of Congress Wednesday and while he didn't seem in a rush to cut interest rates further, investors don't seem very bothered. 

All three major U.S. stock indexes hovered around flat for most of the testimony, flickering between being slightly down and up. Ultimately, they all rose, with the S&P 500 up 0.08%. While the 10-year treasury and 3-month treasury yields move ever-so-slightly closer to inversion (there is currently a positive spread), the movements were minimal. 

Powell said early in his testimony that a "sustain [economic] expansion" is the "most likely" scenario for the near future in the U.S. GDP growth for the third quarter came in at 1.9%, better than the expected 1.7%, prompting some strategists to move their expectations for a recession in the next one to two years slightly lower. These words from Powell weren't exactly dovish and for now, he and stock investors seem to be in lock-step, which isn't always the case. The market has recently rallied and the Fed is acknowledging the slightly better economic outlook. 

Powell also mentioned that the Fed must monitor the affects of the interest rate cuts the agency has already enacted in the latter half of 2019. He noted that monetary policy operates on a lag, meaning that when the Fed moves interest rates, the economic data doesn't immediately respond. It's responsible for the Fed to monitor the impact of rate cuts before making more decisions. Meanwhile, the market is pricing in a lower probability of a March 2020 rate cut, as CME Group data has the chance of that outcome at 3.7%, below Tuesday's probability of 4.4%. 

But Powell said that inflation pressures are muted and that the economic growth the U.S. has seen in 2019 has been partially a result of lower interest rates. 

Investors aren't worried. Several strategists and investors have said recently that the probability of a rate cut in March may soon rise as the date draws closer. Many are confident that Powell will cut rates if need be and he did say that the Fed is data dependent and that any deterioration in the data could prompt accommodative policy. "If the data turns south, the Fed will be there to add more stimulus," Tony Bedikian, head of global markets at Citizens Bank told TheStreet. 

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