WASHINGTON (Reuters) – The US Federal Reserve during its 105-year history has changed monetary policy in response to property crashes, wars, economic bubbles, and policemen – intestinal instincts about where the economy was heading.
But the US central bank is now laying the groundwork for its first political shift triggered by tweets, when Fed officials intervene on how the Earth shifted on May 30 when US President Donald Trump threatened on Twitter to impose new import tariffs on Mexico if it was not Agree to curb the flow of immigrants across the US-Mexico border.
The US economy did not change much in the days that followed. But Trump's statements spooked financial markets so decisively, and the threats to the world economy became so striking that a minimum cut of 25 basis points was backed by Fed's 30 -31
"The Fed has never disappointed a market with such expectation expectations," Joseph Lavorgna, chief economist for America at Natixis, wrote in a recent analysis.
With investors in contracts linked to the Fed's targeted lending rate, which suggests a reduction of nearly 100 percent, it would be impeccable for the Fed not to cut, Lavorgna wrote.
Powell is scheduled to appear before the US Financial Services Representative Committee at 10:00 am EDT (1400 GMT) as part of its biannual monetary policy testimony to Congress.
Four hours later, the Fed is due to constitute the minutes of its last political meeting, when officials spread to a surcharge as early as this month.
The protocol will show the extent to which the central bank's thoughts shifted in the days following Trump's Mexico tariff threat, and how the discussion was shaped by other concerns, including weak inflation.
Powell will return to Congress on Thursday to testify to the Senate Bank Committee.
Although US economic growth remains largely on track, and the June job report showed continued strong employment, events in May changed US trade policies from some of a sideshow in the Fed's view of a central concern.
Earlier rounds of US tariffs on trading partners, including China, were rejected with little macroeconomic significance, with the Fed still assuming the key rate at the beginning of May would remain unchanged at 2.25% to 2.50% for the rest of the year.
Contrary to the fact that the higher tariffs announced against China at the beginning of May, an increasing feeling that the world's two largest economies could not make an appointment and the tariff threat to Mexico contributed to the growing sense of protectionism and higher tariffs were here to stay – at a certain cost for investment and growth.
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The case for lowering loan costs is not entirely determined. Reducing prices at this point would be similar to the Fed's mid-1990s efforts to nurse along a long-term recovery rather than responding to a threatening decline, and "there is no immediate need to move," Philadelphia Fed President Patrick Harker said. Tuesday.
But Trump's tweets about Mexico had a particularly disturbing influence, touched by enough volatility and doubt about the future that pushed the Fed against the much-cut Trump has demanded for other reasons.
As Trump tied the endangered charges, which would have hit one of the world's most integrated supply chains, to non-economic immigration requirements, investors over two days beat a quarter of a percentage point from the federal fund price as expected at the end of 2019.  It added a complete additional price to one of the investors who had already expected, and increased the market pressure for the Fed's growing list of concerns.
At the Fed's last political meeting in mid-June, the 17 policemen saw the need for at least one speed cut by the end of the year, and Powell told reporters afterwards that many others leaned in that direction. The protocols can show how strong that bias has become.
In the Fed's Monetary Policy Report issued last week in front of Powell's testimony, the commercial war received its own analysis, a sign of the attention it receives in the central bank.
Fed employees concluded the rise in world prices was likely " material "impact on the decline in world trade last year, and that" uncertainty about trade policy may cause companies to delay investment decisions and reduce capital expenditure. "
Although the threatened tariffs in Mexico never materialized and China and the United States have agreed to resume talks to reach a trade agreement, which "did little to ease the uncertainty that Fed officials believe, contributing to global refrigeration commercial and domestic kapex plans, "wrote Deutsche Bank's US economic studies this week.
"We expect Powell to stick with a cautious line," they wrote.
Reporting by Howard Schneider; Editing by Paul Simao