The S&P 500 rose 1.1% after Fed Chairman Jerome Powell said in a much-anticipated speech that the time has come to cut its key interest rate from a decade high. The index has pulled within 0.6% of last month's high and has clawed back almost all of its losses from a brief but terrifying summer swoon.
The Dow Jones Industrial Average rose 462 points, or 1.1%, to close above the 41,000 level for the first time since setting a record in July, while the Nasdaq composite jumped 1.5%.
Speech by US Fed Chairman Jerome Powell on August 23
Powell's speech marked a major shift for the Fed after it began hiking rates two years ago as inflation climbed to its worst levels in generations. The Fed's goal was to make it more expensive for US households and companies to borrow to slow the economy and prevent inflation.
While careful to say the job is not done yet, Powell used the past tense to explain many of the conditions that caused inflation to rise in the wake of the pandemic, including a job market that is no longer “overheated.” That means the Fed can focus more on one of its twin tasks: protecting a slow-moving economy that has so far defied many recession forecasts.
“The time has come for the policy to be reformed,” Powell said. “The path forward is clear, and the timing and speed of rate reductions will depend on incoming data, the evolving outlook, and the balance of risks.” But that second part of his statement contained some of the details Wall Street wanted to hear most.
Bank of Canada's latest cuts
“Canadians are facing cuts admit it today, as the Bank of Canada (BoC) lowered its overnight lending rate by a quarter of a percentage point. It is the second rate cut in as many months from the central bank. It went into effect on June 5, ending a long, 11-month hold-up and officially putting Canada on the path to lower borrowing costs.”
Read the full article: Making sense of the Bank of Canada's July 24, 2024 interest rate decision
Impact on Treasury yields
Treasury yields had fallen sharply in the bond market since April on expectations that the US Federal Reserve's next move would be to cut interest rates for the first time since the COVID-19 crash in 2020. The only questions were how much the US Fed. it would cut and how fast it would go.
The danger is that traders build their expectations too high, something they have often done in the past. Traders see a high probability that the US Fed will cut its interest rate by at least one percent by the end of the year, according to data from CME Group. That would require the US Fed to exceed its standard move of a quarter of a percentage point at least once in its three meetings for the rest of the year.
If their predictions are wrong, which they often are, that could mean that Treasury yields have already fallen sharply since the decline began in the spring. That could depress all kinds of investments.
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