Wall Street Recovers as Powell Confirms Interest Rate Cut in September: As anticipation builds around the Federal Reserve’s monetary policy decisions,
Jerome Powell, the Fed’s Chairman, has confirmed the central bank’s inclination to cut interest rates in September.
These statements have ignited the financial markets, with U.S. stock indices rising significantly while bond yields have dropped sharply.
In this report, we examine the impact of Powell’s statements on the markets and experts’ expectations for future monetary policy.
Content
Possibility of Strong Rate Cuts
Rate Cut Expectations According to Experts
Importance of September Jobs Data
Wall Street Recovers as Rate Cut Expectations
U.S. stock indices rose across all categories, and bond yields fell after Jerome Powell
gave the most unambiguous indication yet that the Federal Reserve will begin cutting interest rates in September.
While Wall Street had already anticipated the start of monetary easing next month,
Powell’s remarks that “the time has come” confirmed these expectations.
Additionally, many other aspects of his Jackson Hole speech should not be overlooked.
For instance, the Fed Chairman acknowledged recent progress in fighting inflation.
He also noted that the economy is growing “at a strong pace,” providing reassurance after recent concerns about growth.
Powell’s Message and Its Impact on Markets
However, Powell’s focus on the “calm labor market” captured the attention of many market observers.
This was largely seen as a signal that the Federal Reserve would
do whatever it took to avoid a noticeable slowdown.
Expert Reactions to Powell’s Speech
Chris Zaccarelli of the Independent Advisor Alliance said,
“The market should be pleased with this speech because it was not hawkish in any way.
It gave the green light for a 25 basis point rate cut
while leaving the door open for larger cuts if necessary.”
Certainly, larger rate cuts could also be a warning sign for stocks,
as they might indicate a rush to prevent an economic downturn.
Risks of Large Rate Cuts
Zaccarelli noted, “It is important at this time to take a balanced approach to investing,
not planning for an imminent recession, chasing risks,
and not becoming complacent just because the Federal Reserve will cut rates in less than a month.”
Meanwhile, Richard Clarida of Pacific Investment Management pointed out
Powell’s speech did not address any specific discussion about the terminal federal funds
rate at the end of this monetary easing cycle or the pace of rate cuts in the coming period.
Impact of September Jobs Data
Clarida, who is also a former Vice Chairman of the Federal Reserve, said,
“The details are yet to be focused on, but for the Federal Reserve, the direction seems clear.”
He added that the August jobs report
will likely determine whether the Fed will opt for a 25—or 50-basis-point cut.
The S&P 500 index rose by over 1%, with all major sectors advancing.
Treasury bond prices rose across all maturities, and the two-year bond yield fell below 4%.
The dollar lost 1% of its value.
Swap traders now expect a total rate cut of more than 100 basis points this year,
implying a cut at each remaining monetary policy meeting until December,
including a significant 50 basis point cut.
Pace of Rate Cuts
David Russell of TradeStation said, “This was a significant event.
Jerome Powell today came with a series of hints leaning toward monetary easing.
He clarified this point with a clear call to adjust monetary policy.
This keeps market-supportive conditions in place until the end of the year,
making it difficult to expect a retest of this month’s lows.”
Possibility of Rapid Federal Reserve Action
Krishna Guha of Evercore believes that while Powell did not explicitly mention the “magnitude” of the cuts,
the “pace” suggests the possibility of moving faster than 25 basis points per meeting.
Seema Shah of Principal Asset Management said,
“Powell has rung the bell to start the monetary easing cycle,”
adding, “Powell has not pre-committed to a 50 basis point cut, but make no mistake,
if the labor market shows further signs of slowing,
the Federal Reserve will cut rates with conviction.”
Possibility of Strong Rate Cuts
Neil Dutta of Renaissance Macro Research pointed out that Powell’s speech lacked the word “gradual.”
He noted that, unlike other Federal Reserve speakers,
Powell did not rule out the possibility of a strong rate cut during the policy reset.
Dutta added, “Powell’s legendary status is rising now” (referring to the
Fed Chair’s inclination to cut rates to avoid plunging the economy into a recession).
Rate Cut Expectations According to Experts’ Surveys
Bloomberg’s latest monthly survey of economists finds
that a more significant labor market downturn than previously
thought would prompt the Federal Reserve to cut interest rates faster and more aggressively.
This would reduce the federal funds rate by 75 basis
points by the end of this year from its current level
compared to the July survey, which anticipated a 50 basis point cut
followed by a faster pace of cuts through 2026.
Importance of September Jobs Data
While many focused on Powell’s speech at the Jackson Hole Symposium,
Michael Wilson of Morgan Stanley believes that early September jobs data will be of greater importance.
Wilson, the bank’s Chief U.S. Equity Strategist, said in an interview with Bloomberg TV,
“It’s about the job data.
That’s what will determine what the Federal Reserve does. They’ve said that.
And that’s what the market will focus on.”
Wall Street Recovers as Powell Confirms Interest Rate Cut in September