WASHINGTON (Reuters) – A confidence shock driven partly by the U.S. trade war is at the centre of an increasingly persuasive argument for Federal Reserve policymakers seriously considering cutting rates for the first time in a decade.

Federal Reserve Chairman Jerome Powell on Wednesday set the stage for the rate cut this month, as records from policymakers’ latest meeting showed increasing fear that a U.S.-China trade war that has done little to directly restrain growth is indirectly causing businesses to hold back on buying equipment, giving workers a raise and hiking their prices.

Those factors have conspired to pose a serious risk of ending the economic expansion by pushing growth and inflation lower. The Fed is getting closer to lower rates to take out “insurance” that does not happen.

Powell used an appearance here before his congressional overseers on Wednesday to confirm that the U.S. economy is still under threat from disappointing factory activity, tame inflation and a simmering trade war.

Those are the kinds of uncertainties that “many” policymakers called out here as suggesting the need for a rate cut “in the near term,” according to records from the Fed’s rate-setting meeting, which were released shortly after Powell concluded several hours of testimony before the U.S. House of Representatives Financial Services Committee.

“Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. outlook,” Powell said.

At that June 18-19 meeting, some Fed policymakers worried that they may need act to lift inflation that is failing to meet the U.S. central bank’s 2% annual target and to combat a pervasive pessimism among corporations that they see holding back business investment. Lower rates could “cushion the effects” of shocks from the trade war, according to the minutes’ summary of the case for a cut.

“Powell’s really making the case that an insurance rate cut is important so July is looking much more likely despite the fact we had a pretty good jobs report,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

U.S. stocks traded higher, with the S&P 500 .SPX briefly crossing the 3,000-point mark for the first time. Short-term bond yields fell, and the U.S. dollar .DXY fell against a basket of other currencies.

GROWING CONCERN

Powell and the meeting records both shed light on what is concerning the Fed about an economy they concede is still likely to grow.

The short version: Global growth is weak, manufacturers are slowing their investments and not raising their prices partly because of the trade war and the U.S. job market is not hot enough to cause worrisome inflation.

Powell focused on “broad” global weakness, rather than good news, insisting that pledges by Washington and Beijing in recent weeks to return to the negotiating table to iron out their differences on trade failed to remove uncertainty.

“Uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. outlook,” Powell said.

In his testimony, the first instalment of two days on Capitol Hill this week, Powell also downplayed a strong June jobs report and dismissed claims that the U.S. labour market is hot. Central banks fight inflation by raising rates when the jobless rate reaches unsustainably low levels, and unemployment is near its lowest levels since 1969.

“We don’t have any evidence for calling this a hot labour market,” Powell told lawmakers. “To call something hot we need to see some heat.”

The once-strong connection between low unemployment rates, higher wages and prices has weakened “to the point where it’s a faint heartbeat,” he said later in the day in response to questioning by Democratic Representative Alexandria Ocasio-Cortez.

“We really have learned though that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”

The minutes echoed that sentiment: “several participants pointed out that they had revised down their estimates of the longer-run normal rate of unemployment and, as a result, saw a smaller upward contribution to inflation pressures,” and a better case for lower rates.

Powell also cited European and Asian economic data as continuing “to disappoint” and weighing on U.S. growth, the head of the U.S. central bank said.

Policymakers also appear to be far more worried about a lack of confidence that is seeping into troubling spending and pricing decisions.

Several Fed policymakers spoke at the latest meeting about how their business contacts are now thinking that trade-war and other uncertainties are hanging over their investment decisions not just now but “over the medium term,” according to the minutes. Manufacturers, they said, are putting big spending and hiring plans on hold and reevaluating where and how they build their goods because of the trade war.

THE TRUMP BACKDROP

The hearing, part of the Fed chief’s semi-annual testimony on monetary policy to Congress, took place against the backdrop of U.S. President Donald Trump’s frequent criticism of the Fed and the White House’s demands that the central bank lower rates.

The Fed, which hiked rates four times last year, has kept its current benchmark overnight interest rate in a range of between 2.25% and 2.50% since December.

Powell, chosen by Trump to run the Fed but now out of his good graces, has worked hard to build relations among lawmakers, and even on a Democratic-controlled committee won plaudits and encouragement to stay on the job.

Asked by Representative Maxine Waters, who chairs the committee, if he would “pack up and leave” if the president demanded it, Powell replied with a curt “no ma’am … The law clearly gives me a four-year term and I fully intend to serve it.”

Trump’s May 30 comments on Twitter threatening to impose tariffs on Mexico unless the country met his demands for tougher controls on immigrants crossing its northern border also helped spook markets and spark a shift in the Fed’s thinking.

Earlier rounds of U.S. tariffs on trading partners including China had been dismissed by the Fed as of little macroeconomic importance, with central bankers in early May still anticipating the policy rate would remain unchanged for the rest of the year.

By contrast, the higher tariffs announced against China in early May, a rising sense the world’s two largest economies might not be able to make a deal, and the tariff threat against Mexico added to a growing feeling that protectionism and higher tariffs were here to stay – at a cost to investment and growth.

The case for lowering borrowing costs is not fully decided. Not all policymakers were convinced at the last meeting.

Powell will testify again on Thursday before the Senate Banking Committee.