Powell did not rule out a rate cut in September. Major US indices soared

US Fed Chairman Jerome Powell hinted at a possible rate cut as early as September in his speech at the Jackson Hole Economic Forum. All major US stock market indices reacted with a rapid growth.

Chairman of the U.S. Federal Reserve Jerome Powell left the possibility of an interest rate cut at the regulator's meeting on September 16-17, follows from his speech published on the website of the Fed. According to him, the baseline forecast and the changing balance of risks "may require adjustment" of the Fed's position.

"Our key rate is now 100 basis points closer to neutral than it was a year ago, and the stability in the unemployment rate and other labor market indicators allows us to proceed cautiously when considering changes in our policy stance. Nevertheless, with policy remaining in restrictive territory, the baseline outlook and the evolving balance of risks may require adjustments to our stance," the Fed chief said.

Powell's words were much stronger in signaling an impending easing of monetary policy than investors expected: at least that's how it looks at first glance, Bloomberg noted.

"Dovish" signals from the Fed chief pushed U.S. stocks to surge.

- The main U.S. market index, the S&P 500, jumped 1.5 percent in trading, breaking a five-day decline.

- The blue-chip index Dow Jones Industrial Average soared 1.5%.

- The Nasdaq Composite index added 1.8%.

- The VIX index, also called the "Wall Street fear index," collapsed 11%.

- Treasury yields declined: two-year securities, which are more sensitive to changes in monetary policy, fell by up to 10 basis points, while the yield on benchmark 10-year treasuries fell to 4.25% - the lowest level in a week, Bloomberg reports.

According to the Fed Chairman, the U.S. labor market is now in balance, but it is of a "curious nature" as it has been shaped by a marked slowdown in both labor demand and supply. This raises downside risks to employment.

"What this unusual situation could mean is that downside risks to employment are building. And if they materialize, it could happen quickly - in the form of a surge in layoffs and rising unemployment," Powell said.

The Fed chief also touched on the issue of US President Donald Trump's import duties. According to him, the impact of import duties on consumer prices has already become evident, and these effects will only accumulate in the coming months with high uncertainty about timing and volumes. The question for monetary policy is whether this will lead to a significant increase in inflation risks.

"A reasonable baseline scenario assumes that the effect [of duties] will be relatively short-lived - a one-time change in the price level. Of course, "one-time" does not mean "simultaneous". It will take time for duty increases to affect supply chains and distribution networks. Moreover, tariff rates will continue to change, potentially delaying the adjustment process," Powell said.

"In the short term, the risks to inflation are skewed to the upside and the risks to employment are skewed to the downside - a challenging situation," Powell added.

"This is a big relief for the market, as the Fed chief is almost always well overdue in recognizing obvious economic changes. We expected the Fed to cut rates two or three times this year as we anticipated a weakening labor market that would prompt the Fed to act. Now the Fed chief has finally recognized this apparent slowdown and laid the groundwork for a [rate] cut in September," Infrastructure Capital Management LLC founder Jay Hatfield said in a Bloomberg story.

"Before the speech, some investors were expecting a somewhat hawkish tone from Powell, but it turned out to be rather balanced (...). That said, regardless of whether the Fed starts cutting rates in September or October, once the process starts, the cuts will exceed the 1% that markets are currently pricing in and will occur at every meeting in a row, without pause," said Ira Jersey, analyst at Bloomberg Intelligence.

"Fed Chairman Jerome Powell's speech was softer than markets expected," agreed Stephen Brown, deputy chief North American economist at Capital Economics. - His conclusion that "with policy in a constrained area, the baseline outlook and the evolving balance of risks may require adjustments to our stance" is a clear signal that a rate cut in September is now the most likely outcome. Nevertheless, Powell's continued caution suggests that either a very strong August employment report or much more worrisome price data could still cause a delay."

After Powell's speech, market participants adjusted expectations from the Fed's September meeting: while before the speech traders estimated the probability of a rate cut next month at 69.5%, afterward it was more than 89%, according to data from CME FedWatch, a market expectations monitoring tool for Fed decisions.

The Fed's Jackson Hole symposium does not usually lead to sharp stock market moves unless there are major changes in monetary policy, Bloomberg wrote before Powell's speech. Since 2000, the S&P 500 index has averaged a 0.4 percent gain in the week after the event, according to the agency.

To maintain flexibility, Powell may remind investors that any decision at the Fed meeting will depend on upcoming employment and inflation reports scheduled for release early next month, the agency conceded.

This article was AI-translated and verified by a human editor