Economy

Federal Reserve chairman signals cut in United States interest rates

Federal Reserve chairman signals cut in United States interest rates

Federal Reserve officials in fact marked down their estimate of the longer-run policy rate to 2.5 per cent in June, from 2.8 per cent in March.

Policymakers have dimmed their outlook for the economy since last increasing interest rates in December, citing cooler global growth, below-target inflation levels and ongoing trade tensions.

In testimony on Capitol Hill, the Fed chief was asked by Representative Maxine Waters (D-CA) if he'd heed a theoretical call by Trump to step down.

Core inflation, which is seen as a truer measure of domestically generated price pressures because it ignores volatile commodity items like energy and food, rose 0.3% last month when markets were looking for just a 0.2% gain. "Our most hard problem is not our competitors, it is the Federal Reserve!".

The weak dollar also sent the price of gold rallying 2 per cent to sit around US$1,420 an ounce.

Asian markets rallied on Thursday (July 11) and the U.S. dollar suffered further across-the-board losses after the head of the United States central bank all but guaranteed the first USA interest rate cut in a decade later this month.

Prospects of a US interest rate cut also spurred investors towards riskier assets, with the S&P 500 briefly crossing the 3,000-point mark for the first time. The Fed Funds rate is now 2.5%.

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.

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Above: Pound-to-Dollar rate shown at 15-minute intervals.

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"Fed not only focused on concerns within the US economy, but also took into consideration the global economy, negative impact from trade wars and basically hitting all the right buttons for gold bulls". On average, the economy has added 172,000 nonfarm payrolls per month between January and June.

Ahead of the testimony by Fed Chair Powell, Fed funds futures were pricing in a 97.5% chance of a 25-bps rate cut and a 1.5% chance of a 25-bps rate hike in July. "This doesn't suggest that the Fed is seriously contemplating the 100bp of rate cuts that financial markets are now expecting by the end of 2020".

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.

It's raised rates nine times since the end of 2015 but with the growth-boosting effect of 2018's mammoth tax cuts now wearing off and the U.S. Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX.

This is a reversal of his previous plans that would steadily raise rates this year.