Markets ended the week largely unchanged following comments by Fed Chair Jay Powell on Friday which sparked a strong rally. Prior to Friday, markets had drifted lower, concerned that recent inflation readings might dissuade the Fed from making a rate cut in September. However, speaking at the Fed’s annual economic symposium in Jackson Hole on Friday, Powell intimated that recent weakness in labor market data might be sufficient to warrant a rate cut.
In his speech, Powell touched on tariffs, inflation, and employment, stating the effects of tariffs on inflation are now “clearly visible”, though their ultimate impact remains highly uncertain. Also uncertain is the lasting effects current trade policy will have on broader economic activity.
Addressing the labor market, Powell said it appears to be in a “curious kind of balance” as both supply and demand for workers has slowed before indicating that “downside risks to employment are rising.” Powell also noted that risks to inflation are currently to the “upside” while risks to employment are to the “downside” presenting the Fed with a “challenging situation,” one that might “warrant adjusting our policy stance.”
That was enough to send stocks and bonds soaring. For the day, the S&P gained 1.5%, its best day since May, while small caps, which tend to be more interest rate sensitive than their larger brethren jumped 3.9%, their best day since April 9 when President Trump paused the majority of his April 2 tariffs.
Fixed income markets also reacted positively to Powell’s comments with the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market gaining 0.6%, its largest daily increase since early June. More broadly, Treasury yields across the curve saw modest declines, while market predictions for a September rate cut remained at ~85% and odds for a second rate cut by December increased from ~70% to ~85%.
