WASHINGTON — Federal Reserve Chair Jerome H. Powell signaled that an interest-rate cut may come soon, sending stocks to a new high as the benchmark S&P 500 stock index traded above 3,000 for the first time.
Mr. Powell, testifying before the House Financial Services Committee on Wednesday, said risks to the United States economy remain, including President Trump’s trade war and global economic weakness, suggesting a cut may be more likely than not when the Fed meets again later this month.
While the Fed continues to expect a solid job market and gradually increasing inflation, officials have been watching data to gauge whether a rate move is needed to sustain the economic expansion, which hit a record length earlier this month. Mr. Powell told lawmakers that “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
Those comments, which suggest economic trouble on the horizon, pushed markets higher, as investors ignored the possible storm clouds and cheered the increased likelihood that the Fed will soon lower borrowing costs and make stocks more appealing.
Falling interest rates lift stocks in two ways. They lower the returns on new investments in bonds, the main alternative to stocks for many investors. That makes stocks look more attractive to investors. A rate cut also makes it cheaper for consumers and companies to borrow, and that can buck up economic activity and help corporate profits.
While an economic downturn would ultimately be bad news for the stock market, the economy is currently strong, job gains are solid and inflation is muted, fueling a stock market rally. The S&P 500 is up about 19 percent in 2019, after already enjoying one of the longest bull markets on record. Since the climb began in March 2009, the index has more than quadrupled.
Fed officials said in June that they would monitor the impact of Mr. Trump’s trade war and signs of global weakness and act if needed to keep the United States economy humming. Since then, “uncertainties about the outlook have increased in recent months,” Mr. Powell said, adding that “a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.”
Brexit refers to Britain’s ongoing negotiations to exit the European Union. The federal debt ceiling may need to be raised early this Fall in order for the government to borrow more money.
One of the biggest risks continues to be Mr. Trump’s trade war with China. While Washington and Beijing have agreed to restart trade negotiations, Mr. Powell said that did not guarantee an end to a trade war that has begun to inflict economic damage around the globe.
“We’ve agreed to begin discussions again with China — while that’s a constructive step, it doesn’t remove the uncertainty,” Mr. Powell said, saying that a strong June jobs report didn’t change the outlook on interest rates. “The uncertainties around global growth and trade continue to weigh on the outlook, in addition, inflation continues to be muted.”
Investors expect the Fed to cut rates at its July 30 to July 31 meeting amid heightened trade tensions and slowing global growth. Mr. Trump has placed tariffs on $250 billion worth of imports from China, which has retaliated against American goods, and it remains unclear whether or when the spat between the two nations will be resolved. Factory indexes around the world are weakening, and domestic price gains have been surprisingly tepid.
While Mr. Powell didn’t explicitly say an interest-rate cut is coming, he pointed to mounting economic concerns and made no effort to walk back market pricing for a July cut. The Fed’s pre-meeting blackout period starts July 20, so officials have just this week and next to manage expectations.
Fed officials avoid committing to interest rate changes ahead of time, but will sometimes provide a clearer signal about where rates are headed if they think investors are far off-base. Doing so avoids unnecessarily stoking painful market volatility.
After jumping out of the gates by more than 0.7 percent, the S&P 500’s gains on Wednesday became more muted throughout trading day. Shortly before 12 p.m., the benchmark index was up roughly 0.5 percent
“Clearly, this dove love is really key to keeping the market suspended higher,” said Michael Purves, chief global strategist at the brokerage firm Weeden & Company.
The 17-member Fed policymaking committee split sharply in June over whether the central bank should cut rates this year, with eight officials projecting a cut before the end of the year and nine pointing to no change or a rate increase. Mr. Powell said at his post-meeting news conference that many of the officials who did not project a rate cut saw the case for one strengthening.
If the Fed lowers borrowing costs this month, the move may please the president. Mr. Trump has been jawboning the Fed to cut rates for months, aiming a barrage of tweets and comments at the central bank.
Fed officials operate independently of the White House and strive to ignore political chatter while making rate decisions.
But tepid price gains make a cut more likely, especially at a time when the global economy is looking shakier. Inflation climbed just 1.5 percent in the year through May, well below the Fed’s 2 percent target. Weak prices are a problem because they increase the risk of economy-harming deflation, and leave policymakers less room to cut rates in a downturn.
Mr. Powell told lawmakers that “there is a risk that weak inflation will be even more persistent than we currently anticipate.”
The Fed chair also made what may be his strongest comments yet that the labor market is not operating in the way Fed officials and most economists would have expected. While unemployment is at a 50-year low, wages have yet to rise in the way they typically should if there are more jobs than available workers.
“We don’t have any basis, or any evidence, for calling this a hot labor market,” Mr. Powell said.
“To call something hot, you need to see some heat, and while we hear lots of reports of companies having a hard time finding qualified labor, nonetheless, we don’t really see wages really responding,” he elaborated. “So I don’t really see that as a current issue.”
Moving rates lower — even just slightly — could signal that the Fed is ready to defend its 2 percent inflation goal, and show that it is prepared to act to offset fallout from the trade war and slowing foreign growth.
But Mr. Powell once again reiterated that he was not acting at the behest of any political pressure, including reports that the White House has looked into demoting him from chair to a Fed governor. Mr. Powell, asked on Wednesday what he would do if Mr. Trump called and attempted to fire him, responded that he would not step down. “Of course I would not do that,” Mr. Powell said. “My answer would be no.”
Pressed for further comment, Mr. Powell reiterated that “I have kind of said what I’ve intended to say on the subject, and what I’ve said is that the law clearly gives me a four-year term, and I fully intend to serve it.”
Mr. Powell is testifying before House lawmakers on Wednesday before appearing before the Senate Banking Committee on Thursday.