US Stocks Eye Record Highs After Powell Signals September Rate Cut
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US stocks surged on Friday and the S&P 500 Index rose 1.15% and is now very near to its all-time highs. Markets have recovered most of their recent losses amid optimism over a soft landing for the US economy. Fed chair Jerome Powell made dovish comments about the likelihood of a September rate cut further emboldening the bulls.
Speaking at the Fed’s annual retreat in Jackson Hole, Wyoming, Powell said, “The time has come for policy to adjust.” He added, “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.”
While Fed officials have sounded dovish for quite some time now, Powell’s comments at Jackson Hole have raised expectations of a September rate cut.
Powell Says US Labor Market Has Cooled
The US labor market has cooled and wage growth has moderated. According to Powell, “labor market conditions are now less tight than just before the pandemic in 2019—a year when inflation ran below 2 percent. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon.”
Notably, in the past, Powell has cited sticky wage growth as among the factors that have fueled inflation and made the US central bank’s job tougher.
Reacting to Powell’s comments, Paul McCulley, a former Pimco managing director, said, “This was a valedictory of essentially Chair Powell turning the page, saying the mission, which has been focused on inflation for the last two years, has been successful,”
US Stocks Rally After Powell’s Comments
Powell’s comments are Jackson Hole were much awaited by markets and while the Fed chair did not provide a timeline for rate cuts, they were still seen as dovish enough to fuel a rally in US stocks. The Dow Jones and Nasdaq Composite Index also added 1.14% and 1.47% respectively on Friday. Leading indices closed in the green for the week and have continued to recover.
Minutes of Fed’s July Meeting
Earlier this week, the minutes of the Fed’s July meeting were released. The minutes stated, “The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”
Fed officials were also optimistic about the trajectory of inflation and the minutes stated, “With regard to the outlook for inflation, participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent.”
The minutes added, “Almost all participants observed that the factors that had contributed to recent disinflation would likely continue to put downward pressure on inflation in coming months.”
Would the Fed Cut Rates by 50 Basis Points?
According to the CME FedWatch Tool, the odds of a 25-basis point rate cut in September are 76% while that of a 50-basis point rate cut is 24%. The expectations were largely unchanged after Powell’s comments as markets are now unanimous about a September rate cut.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, said, “I think the markets’ reaction, which has been the dollar a bit weaker, bond yields a bit lower, is about right. It’s not like he said, ‘Yeah, we’re going to do three (cuts of) 50s to begin the easing cycle.”
Referring to Powell’s comments on employment and inflation he said, “Implicitly, it opens the door to 50s at some point without giving a timetable for it. We still don’t think 50 (basis points) is going to be the first move, but it could come quickly if the labor market continues to weaken.”
Most other observers also see the Fed cutting rates by 25 basis points only. If Powell and Co. indeed cut rates in September it would be the first rate cut since March 2020 when the US central bank was forced to cut rates to zero-bound in the initial days of the COVID-19 pandemic.
Powell has Sounded Dovish For Quite Some Time
The Fed has been on a rate-hiking spree since March 2022 starting with 25 basis points in March 2022 followed by 50 basis points in May. In the next four meetings of 2022, it raised rates by 75 basis points – a pace not seen in years – but toned down the hike to 50 basis points in December. The Fed raised rates four times in 2023 by 25 basis points each to lift the policy rates to the highest since 2007.
Over the last month, Federal Reserve chair Jerome Powell has made some very dovish comments. Last month, speaking with David Rubenstein, chairman of the Economic Club of Washington, D.C., and co-founder of The Carlyle Group, Powell said that the Fed won’t wait for inflation to drop to 2% before it starts cutting rates.
Analysts Turn Bullish on US Stocks
Notably, the consensus view was quite circumspect from US stocks at the beginning of 2024 and the majority of analysts saw a flattish market this year.
However, the rally in tech stocks helped catapult US stocks to record highs and brokerages have raised their target for the S&P 500. Morgan Stanley’s Investment Management’s Andrew Slimmon believes that the S&P 500 would be “closer to” 6,000 by the end of 2024 after bottoming in October.
While a soft landing for the US economy looks like the most likely outcome, some pundits see a recession on the horizon.
Garry Evans, BCA Research’s chief strategist of global asset allocation said, “Every single one of us now believes there’s a recession, and that’s exactly the opposite of what the market believes.”
He added, “A few rate cuts are not going to prevent a recession. Average recession is 10 months… It takes something like a year before fed cuts actually start to give a boost to the economy.”
Meanwhile, for now, markets don’t see recession as likely and US stocks have continued their upward trajectory after Powell’s reassuring commentary at the Jackson Hole Symposium.