Powell leaves no doubt rate cuts are on the way
Stocks and bonds are rallying as the top US monetary policymaker doesn't even mention the word "gradual.”
Over the past 18 months, there have been major market head-fakes where traders thought a rate-cutting cycle was right around the corner only to be proven wrong. The US regional bank crisis. The long stretch of subdued inflation in the second half of 2023.
This time is different: traders’ sentiments are finally being echoed by the man in the best position to make that happen: Federal Reserve Chair Jay Powell.
“The time has come for policy to adjust,” he said during a speech at the Jackson Hole Economic Symposium. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
That key statement is in line with what Powell was expected to telegraph during this address: a September rate cut, with ambiguity about its size.
Ahead of the speech, traders were pricing in slightly more than one-in-four odds of a 50 basis point cut in September; that probability has drifted slightly higher as markets digest the Fed Chair’s remarks.
Recent Fed speakers had suggested that the path lower for interest rates would be “gradual,” a word that was conspicuous by its omission in Powell’s speech today.
“Missing from Powell’s speech is the word ‘gradual,’” said Neil Dutta, head of US economics at Renaissance Macro Research. “Unlike some of the speakers yesterday, Powell is not removing the optionality of doing larger moves as policy adjusts.”
Stocks surged as the Fed Chair removed all doubt as to the US central bank’s next course of action, led by small caps.
Stocks have been mixed on the day of the Jackson Hole speech in recent years, but generally lower four and five weeks after the event.
The US dollar, meanwhile, is on track for one of its worst sessions of 2024 as two-year Treasury yields move lower.
The Fed is ready to start lessening the yoke of high interest rates because the balance of risks facing the economy has changed, according to Powell.
“The upside risks to inflation have diminished,” he said. “And the downside risks to employment have increased.”
