Federal Reserve Chair Jerome Powell has indicated the central bank may reduce interest rates in the first week of September and could mark a change from the Fed’s annual policy of taming inflation. At an economic forum, Powell emphasized that while inflation is still a problem but the Fed is now focusing on the slowing of growth and the cooling of labor markets as a reason to pursue loosening policy.
Markets Get excited about The News
Wall Street was quick to react. In the wake of this news, Dow Jones surged over 400 points as the S&P 500 and Nasdaq both recorded dramatic gains. Yields on the Treasury fell as bond traders weighed the possibility of rate hikes, and it was reported that the U.S. dollar slipped against major currencies, signalling an overall risk-on mindset.
Investor Optimism Rebounds
Analysts believe Powell’s comments restored confidence to markets following months of uncertainty. “This was the green light investors were waiting for,” one strategist observed and pointed to a renewed flow into stocks, especially in areas that are sensitive to rates, such as housing, tech and the consumer sector.
Caution is still in the air
Even with the upswing, some experts warned that the markets might be overtaking the Fed. If inflation rises again or global shocks start to emerge and the central bank is forced to act, it could delay its action. Powell himself has stated that his the bank’s decisions will be dependent on data which will permit flexibility in the coming months.
Global Ripple Effects
International markets also gained in response to the announcement and European and Asian equity markets ending higher. Emerging market currencies grew due to investors anticipating an increase in liquidity for dollars in the event that the Fed eases up on its policies. Commodities like gold and oil had price increases, buoyed by the improved mood.
Looking forward to the month of September
In the meantime investors are keeping an eye on the coming inflation and employment reports that could decide the exact direction of the Fed. If the current trend of moderate growth continues Powell’s September cut hint could signal the start of an new cycle of easing which markets are more than willing to accept.
