The stock market reached record highs on Friday as Federal Reserve Chair Jerome Powell instilled confidence in Wall Street traders for a potential rate cut in September.
The Dow Jones Industrial Average surged over 840 points on Friday, achieving a 1.9 percent increase and closing at a new peak of 45,631.74. Similarly, the Nasdaq composite climbed 1.9 percent, with the S&P 500 index finishing 1.5 percent higher.
Market optimism was fueled by Powell’s remarks at the Fed’s annual summit in Jackson Hole, Wyoming, indicating the central bank’s inclination towards cutting rates due to a slowdown in the employment market.
“Although the labor market seems balanced, it’s an unusual equilibrium stemming from a notable decrease in both worker supply and demand,” Powell stated. “This atypical scenario hints at increasing downside risks to employment. Should these risks occur, they may do so rapidly.”
Powell’s address primarily focused on the potential for higher tariff-related inflation, yet Wall Street eagerly responded to his remarks on the “shifting balance of risks” signaling an employment slowdown, causing stocks to skyrocket.
Eugenio Aleman, chief economist at Raymond James, noted in a Friday analysis, “In a typical Fed language, Chairman Jerome Powell all but confirmed the Fed’s intention to resume its monetary policy easing in the upcoming September Federal Open Market Committee (FOMC) meeting.”
“We had expected the Fed to start lowering interest rates at their October meeting, but his speech, if there are no big changes between now and then, tends to confirm that the Fed is ready to restart policy easing soon.”
Powell declined to say when the Fed would cut, but futures markets immediately ramped up the odds of a reduction at the FOMC’s September meeting. The CME FedWatch tool set the probability of a Fed cut in September at 83 percent, up from 75 percent the day prior.
The Fed has kept interest rates at a baseline range of 4.25 to 4.5 percent since the start of the year, despite immense pressure from President Trump to reduce borrowing costs.
Powell acknowledged Friday that with Fed rates still at a level that would slow economic activity, the bank could move them back toward neutral as it navigates major shifts in the economy.
“Powell believes this adjustment can occur because monetary policy is restrictive, therefore the Fed will aim to normalize rates rather than become accommodative,” wrote Ryan Sweet, chief US economist at Oxford Economics.
“This hints that the next rate cut isn’t the beginning of a series, particularly as Powell stressed that policy isn’t on a preset course and will continue to be based on the incoming data and the balance of risks.”
While Powell’s comments on the labor market took most of Wall Street’s attention, the Fed chief also expressed concerns about the overall impact of Trump’s tariffs on inflation.
Powell said that while the impact of Trump’s tariffs are “clearly visible,” it is not yet clear if they will lead to a one-time increase in prices or trigger a longer-term inflation surge.
“We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts,” Powell said.
