Fed Powell must pick the lesser of 2 evils

The central bank chief risks cutting too much too soon or too little too late

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Good morning investors. It’s getting old at this point, but the S&P 500 hit yet another record close on Tuesday, marking the 36th time this year.

The Nasdaq Composite also closed at a record, while the Dow dipped slightly on the day.

The big news yesterday — and today — is Jerome Powell’s testimony before lawmakers.

Let’s dive in.

Powell weighs inflation vs. labor market

Fed Chair Jerome Powell spent his Tuesday testifying before the US Senate Banking Committee. 

He defended the central bank’s policy decisions, parried questions on the timing of rate cuts, and reiterated that his team remains data dependent

Notably, he said that the balance of risks between inflation and unemployment have shifted.

Increasingly, the health of the economy depends on Powell choosing between two potential pain points.

Cutting rates too soon or too much, Powell explained, opens the door to a rebound in inflation.

Doing the opposite, however, remains problematic for the labor market, which is currently humming along but “not overheated.” 

His remarks follow the Bureau of Labor Statistics reporting Friday that hiring slowed and unemployment inched higher in June.

The jobless rate climbed above 4.0& for the first time in 30 months, while hourly earnings also cooled, according to BLS.

Meanwhile, economists expect CPI data Thursday to show inflation moving lower but not quite at the Fed’s 2% target. Consensus estimates see June CPI clocking in at 3.1% compared to a year ago. 

Powell, for his part, said he needs to see more cooling before cutting rates.

“We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation,” Powell told lawmakers.

“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he added.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Most Fed officials expect one or two interest rate cuts this year, according to their latest economic projections.

Prediction markets agree.

In January, traders forecasted more than four moves lower on the year, though that’s since fallen to just under two, Kalshi data shows.

Kalshi betting markets rate cuts

As expected, Powell did not touch on specifics for when a policy adjustment would happen.

During his March testimony, he suggested that a June cut could be on the table depending on inflation, which ended up hotter than expected through the first quarter. 

Still, his comments Tuesday seemed to tee up a cut rather than a hike.

Plus, he framed it as “when” rather than “if.”

Powell begins his second day of testimony today as key economic data come due later in the week. 

Markets will be watching.  

What is your biggest takeaway from the first day of Powell’s testimony? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Tuesday 11:30 p.m. ET

Elsewhere:

⚡️Tesla stock keeps going up. Shares finished 3.7% higher on Tuesday, marking its 10th consecutive winning session and its longest streak in the green in over a year. Earlier this month, investors cheered on the EV maker after it reported better-than-expected vehicle deliveries for the second quarter. (WSJ)

💰️Janet Yellen agreed with Powell that the labor market is no longer fueling inflation as much as it was before. She told lawmakers Tuesday that the surge in labor supply has helped the employment situation remain relatively robust across the US. (Bloomberg)

🛢️ Oil majors have issued a warning. Shares of BP dropped after the company said its second-quarter earnings would take a hit of up to $700 million due to weaker refining margins. Exxon Mobil echoed the same on Monday, saying that those lower margins are impacting the whole industry. (CNBC)

🍎 Apple just became the first $3.5 trillion company. The stock hit its highest ever on Tuesday, closing at nearly $229 per share to push the iPhone maker to the highest value of any brand ever. Apple has been working with OpenAI to implement ChatGPT across its products. (Quartz)

Rapid-fire:

  • Stocks in Singapore are on pace for six-year highs on the back of earnings potential (Bloomberg)

  • Billionaire Bill Ackman has kicked off fundraising for a new US-listed fund that could bring in up to $20 billion (Reuters)

  • Small-business optimism climbed for a third month in a row in June, hitting a 2024 high (Bloomberg)

  • The Chinese yuan made up 99% of the Russian foreign exchange market in June (Business Insider)

  • A renowned housing analyst who predicted the 2008 crash says the current real estate market will more closely resemble the stretch around 1980 (ResiClub)

  • Economist Ed Yardeni argues that Trump 2.0 could benefit investors (FT)

  • A hedge fund trader in Canada faces four years in prison for faking returns (Bloomberg)

Last thing:

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