Wall Street rallies as Fed chair Jerome Powell signals rate cuts

Dow closes at high while traders increase bets for reduction next month

US markets rallied on Friday after Fed chair Jerome Powell opened the door to cut interest rates as early as next month.

In a highly anticipated address at the Jackson Hole Economic Symposium in Wyoming, Mr Powell said changing conditions in the economy “may warrant adjusting our policy stance”.

The remarks were the first made by the US Federal Reserve chairman since a dismal jobs report last month showed signs of a weakening labour market. Unlike other central banks, the Federal Reserve has a dual mandate of price stability and maximum employment. “The balance of risks appears to be shifting,” he said.

The Dow Jones Industrial Average surged 846 points, or 1.89 per cent, to close at an all-time high. The S&P 500 and Nasdaq Composite rose 1.52 and 1.88 per cent, respectively.

The 10-year Treasury yield, meanwhile, fell about 8 basis points to 4.25 per cent. The yield on the two-year Treasury fell more than 10 basis points to 3.69 per cent.

The price of spot gold rose $35.70, or 1.06 per cent, to $3,417.30 per ounce.

Fed's Jerome Powell leaves door open for US interest rate cuts

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Traders increased their forecast of a September rate cut to about 90 per cent after Mr Powell's speech, according to CME Group's FedWatch tool.

The Federal Reserve has maintained its target range for interest rates at 4.25 to 4.50 per cent this year after cutting rates by 100 basis points in 2024. The UAE Central Bank, which mirrors Fed decisions because of the dollar peg, has also kept its base rate unchanged.

A far-weaker-than-expected July jobs report changed the calculus facing the central bank. The report showed the US economy had added far fewer jobs than anticipated, pointing to a weakness in the labour market.

The jobs report came two days after the Fed's July 17-18 meeting. Art Hogan, chief market strategist at B Riley Wealth, said he believed the central bank would have cut rates if the report came in before then.

“Now, the Fed has the ability to shift policy,” he said. “That's not necessarily saying that they're going to cut rates in September, but it's certainly telling you why they would, and I think that's why markets are relatively excited about how that went.”

Peter Andersen, founder of Andersen Capital Management, said he was surprised to see traders rally around the prospect of a September rate cut.

“I really cannot see a strong justification for lowering rates,” he said. “The macro gestalt of the economy right now doesn't seem like it's under tremendous stress that we need a rate cut.”

Fed officials have adopted a wait-and-see approach towards rate-setting this year, pointing to economic uncertainty caused by US President Donald Trump's tariffs and other policies.

This comes as inflation remains above the Fed's long-term two per cent goal, and underlying data showed that tariffs are leading to price pressures across some imported goods.

“When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” Mr Powell said.

While Mr Powell expressed commitment to keeping inflation – which is still above the Fed's long-term target – he suggested that the labour market warrants greater attention.

He described the labour market as one that is in a “curious kind of balance” as a result of a slowdown in the supply of and demand for workers, which he said shows that the downside risks to the Fed's employment mandate is increasing.

“And if those risks materialise, they can do so quickly in the form of sharply higher layoffs and rising unemployment,” he said.

The Federal Reserve holds its next two-day policy meeting from September 16 to 17.