Stocks staged a powerful rebound and bond yields fell after Jerome Powell said a Federal Reserve rate cut could happen as soon as September.
The S&P 500 climbed 2%. Treasury 10-year yields declined four basis points to 4.1%. The dollar fell.
In a press conference, Powell said the economy is moving closer to the point at which it will be approppriate to cut rates — but "we're not quite at that point yet." He added the U.S. job market is "strong but not overheated." Consumer spending "slowed" but remains "solid," he said.
Policymakers made several adjustments to the language of a statement released after their two-day meeting in Washington. Notably, the committee shifted to saying it is "attentive to the risks to both sides of its dual mandate," rather than prior wording focused just on inflation risks.
Wall Street Reactions
Ryan Detrick at Carson Group: "As expected, the Fed is setting the table for interest rate cuts starting at their next meeting in September. Inflation has improved substantially, and we've even seen wages come back to earth the last few months. The reality is inflation is slowing and the Fed doesn't need rates this high anymore. In fact, one very real worry is the economy could slow over the coming quarters and this is why rate cuts are necessary. We think three cuts this year are quite likely."
Jeffrey J. Roach at LPL Financial: "The Fed used today's statement to prepare markets for upcoming rate cuts. As inflation rates improve and unemployment increases, the Fed can cut rates yet keep the nominal funds rate above the inflation rate. Markets will likely respond favorably to the subtle shift in tone."
Rajeev Sharma at Key Wealth: "The Fed's language today has opened the door wider for a September rate cut, but falls short of committing to one. Markets should anticipate a more likely signal for a September rate cut at Fed Chair Powell's Jackson Hole address in late August, where he will have another month of jobs and inflation data in hand."
Chris Larkin at E*Trade from Morgan Stanley: "Today was simply a placeholder — a day the markets were looking for more assurance about a September rate cut. They didn't necessarily get anything concrete from the Fed's statement, but if economic data continues to weaken over the next several weeks, the discussion may shift to speculation that the Fed has waited too long to pivot. That sentiment has the potential to add to the stock market's choppiness as we head toward what is historically its most volatile period."
Quincy Krosby at LPL Financial: "The markets positive reaction suggests traders and investors alike see the Fed easing at the September meeting because inflation continues its path lower rather than an emergency cut because the labor market is deteriorating."
