Markets Rally as Powell Signals Fed Pivot and September Rate Cut

During his highly-anticipated speech today at the annual Jackson Hole Economic Symposium, Powell said "the time has come for policy to adjust."

Gary Chalmers August 23, 2024Last Updated: September 4, 2024

2 minutes read

Markets rally as Fed Chair Jerome Powell stands at a podium giving a speech on monetary policy. — Fed Chair Jerome Powell gives introductory remarks at the 2023 Moynihan Lecture in Social Science and Public Policy, on October 25, 2023. (Federal Reserve, Flickr)

Federal Reserve Chair Jerome Powell has set the stage for a series of interest rate cuts, with markets and analysts predicting a significant policy shift at the central bank’s September meeting. Powell’s remarks at the annual Jackson Hole Economic Symposium on Friday provided strong hints that the Fed is ready to ease its monetary policy after a prolonged period of aggressive rate hikes aimed at curbing inflation.

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During his much-anticipated Jackson Hole speech today, Fed Chair Powell declared:

“The time has come for policy to adjust.”

Although he did not commit to specific timing or the scale of the cuts, his remarks signaled that the Fed may be preparing to lower rates in response to easing inflation and a cooling labor market. Financial markets reacted swiftly, with the S&P 500, Dow Jones Industrial Average and NASDAQ all rallying over 1% by the end of the day, reversing losses from earlier in the week.

Economists and financial experts expect the Fed to initiate a rate cut at its upcoming September 17-18 meeting, potentially reducing rates by 25 to 50 basis points. “In his Jackson Hole speech, Fed Chair Powell sealed the deal for a September rate cut,” stated Bank of America economists, led by Aditya Bhave.

Economic Landscape Shifts

Powell’s speech underscored a changing economic landscape. Inflation, which surged to over 7% in 2022, has since cooled, hovering around 2.5%, close to the Fed’s long-term target of 2%. This decline has given the Fed room to pivot its policy focus from controlling inflation to bolstering the labor market, which has shown signs of slowing in recent months. Unemployment has risen slightly to 4.3%, and job growth has softened, with employers adding fewer jobs than anticipated.

“We do not seek or welcome further cooling in labor market conditions,” Powell noted, reflecting the Fed’s shifting priorities. His remarks suggest that the central bank is increasingly concerned about potential job market weakening, as revised data showed that 818,000 fewer jobs were created between April 2023 and March 2024 than previously reported.

Source: CNBC Television YouTube

Implications of Rate Cuts

A reduction in interest rates could provide much-needed relief for businesses and consumers. Lower borrowing costs could boost corporate profits and make loans, such as mortgages and car loans, more affordable. Historically, rate cuts have been associated with stock market rallies, and Friday’s surge in major indexes reflects market optimism.

Economist Paul McCulley commented on Powell’s speech today, stating:

“This was a valedictory of essentially Chair Powell turning the page. The mission, which has been focused on inflation for the last two years, has been successful.”

While the exact magnitude of the cuts remains uncertain, analysts expect the Fed to move cautiously, balancing the need to support the labor market with the goal of preventing inflation from resurging.

Markets Rally on Fed Pivot

U.S. markets responded favorably to Powell’s speech today, where the Fed chair announced the central bank was pivoting its monetary policy strategy.

With Powell signaling a likely September rate cut, all three major U.S. indices rallied today, with the S&P 500 (SPX) closing the day up 1.15%, while the Dow Jones Industrials Average (DOWI) and NASDAQ Composite (NASX) closed today up 1.14% and 1.47%, respectively.