Jerome Powell set the stage for the central bank to cut interest rates to bolster flagging growth. The S&P 500 and the Nasdaq Composite touched all-time highs, with the S&P briefly eclipsing the 3000 level for the first time. The indexes were up 0.6% and 0.7% in recent trading, respectively. The Dow Jones Industrial Average climbed 0.6%, on track to snap a three-day losing streak.
“Now everybody is really confident that the Fed is going to cut rates at the July meeting,” said Shana Sissel, senior portfolio manager for CLS Investments, an Omaha, Neb., firm that manages about $10 billion. “That’s put a lot of people’s minds at ease.”
Major U.S. indexes had faltered in recent days as investors weighed an economic slowdown against the odds the Fed will bolster the economy by cutting interest rates. Mr. Powell’s testimony prepared for the House Financial Services Committee was released before Wednesday’s opening bell, and signaled that the Fed will likely cut rates later this month.
Mr. Powell said the economic outlook hasn’t improved in recent weeks, and “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continues to weigh on the U.S. economic outlook.”
Federal-funds futures, used by investors to bet on central-bank policy, show a 21% chance that the Fed will cut rates by half a percentage point at its July 31 meeting, up from 3.3% yesterday. The odds of a quarter-point cut stand at about 79%.
The yield on 10-year U.S. Treasurys fell to 2.047% from 2.058% on Tuesday. Yields and prices move in opposite directions. The S&P 500’s crossing of the 3000 threshold has taken nearly 5 years. It broke through 2000 for the first time in August 2014.
Energy companies got a boost from rising oil prices after U.S. industry group American Petroleum Institute on Tuesday showed a sharp drop in oil stocks. U.S. oil futures rose 3%, or $1.77 a barrel, to $59.60. Natural gas gained 2% to $2.47 per million British thermal units. Oil and gas producer Noble Energy Inc. was up 2.7% to $22.10 a share.
While the markets clearly welcomed signs of a rate cut, not everyone is convinced that the Fed should act now. Last week’s stronger-than-expected jobs report runs counter to fears of a slowdown, and last month’s trade cease-fire between the U.S. and China has lessened one drag on the economic picture, Ms. Sissel said.
“We have a lot of positives going on right now, and I don’t think the Fed should use this bullet,” Ms. Sissel said. “They should save it for when they need it.” Rep. Carolyn Maloney (D., N.Y.) asked Mr. Powell whether last week’s strong jobs report for June had changed the picture.
“The straight answer to your question is no,” Mr. Powell responded. He pointed to economic data, particularly in Europe and Asia, that has “continued to disappoint.” A detente between the U.S. and China also isn’t definitive.
“While that’s a constructive step, it doesn’t remove the uncertainty that we see as overall weighing on the outlook, “ Mr. Powell said. Europe’s pan-continental Stoxx Europe 600 wavered between gains and losses.
Data showed the British economy returned to growth in May, reversing a two-month slowdown and easing fears of a contraction in the second quarter. A 24% rise in car production drove the uptick, as auto makers restarted factories they had idled in anticipation of Brexit, which was originally scheduled to take place in April.
However, analysts cautioned that the broader economic picture in the U.K. remains subdued, despite the improvement in manufacturing.
“Recent PMIs indicate that the service sector—which makes up the lion’s share of the U.K. economy—has struggled to regain momentum amid mounting Brexit uncertainty,” said James Smith, ING developed markets economist, adding that he expects business investment to resume its downward trend over the summer.
Aside from the Fed’s policy outlook, Peter Dixon, senior economist at Commerzbank, said investors will be eager to see how Mr. Powell responds to a grilling from lawmakers over concerns that his independence is being undermined by pressure from President Trump, who has criticized him for allowing the dollar to become too strong.
Minutes from the central bank’s recent policy meeting are due for release later Wednesday, which could provide additional detail on how officials viewed the economic environment.
Asian markets mostly closed higher, although Shanghai-listed stocks slipped after Chinese consumer inflation held steady in June. The consumer-price index rose 2.7% on year, in line with expectations, as slowing nonfood prices offset faster gains in food prices.