Powell Cheers Markets Looking for Signs on Rate Cuts

The markets liked what Jay Powell, the Fed chair, had to say on Day 1 of his Capitol Hill testimony.Credit…Cheriss May for The New York Times

Powell’s balancing act

The S&P 500 is on a six-day winning streak and closed at another record on Tuesday, as investors grow more confident that the Fed could cut interest rates soon.

The market rally came after Jay Powell, the Fed chair, made encouraging comments about inflation and the labor market in his first of two days of testimony on Capitol Hill.

The Fed is in a delicate situation. Lowering rates prematurely could risk reigniting inflation, and doing so too slowly could undermine growth. “We’re very much balancing those two risks, and that’s really the essence of what we’re thinking about these days,” Powell told the Senate Banking Committee on Tuesday.

Investors are focusing on the upside. In something of a rarity in recent months, financial services stocks led the way on Tuesday. That was after Powell said that regulators were “very close” to agreeing on a revamped proposal on how much capital big banks would be required to hold — a potentially big victory for Wall Street.

Here are the key takeaways from Tuesday’s hearing:

• The good: The jobs picture points to a soft-landing scenario. A recent drop-off in hiring and wage gains indicates that the labor market is “not a source of broad inflationary pressures for the economy now,” Powell said.

• The better: The first-quarter uptick in inflation hasn’t persisted. “The most recent monthly readings have shown modest further progress,” he said, adding that just two months ago he wouldn’t have reached that conclusion.

• The best (for Wall Street): Powell’s update on new capital requirements for lenders sent shares of Goldman Sachs to a new high, and lifted other bank stocks, on hopes that the hotly contested measures would be tamer than first feared. In March, he signaled that the Fed could scale back or rework the rules. On Tuesday, Powell laid out a timeline that could see a final proposal bogged down in review for months.

Powell will testify again on Wednesday, this time before the House Financial Services Committee. Expect more questions about the proposed banking rules, the economy and the Fed’s timing on rate cuts. On Tuesday, he deflected questions on market speculation that the first cut could come in September, saying that Fed policymakers were looking for “more good data” that inflation is edging closer to its 2 percent target before it begins lowering borrowing costs.

That makes Thursday’s Consumer Price Index report a key data point to watch.