Jerome Powell Finally Concedes 'Rate Cut Could Be On The Table' In September: Stocks, Gold Rise, Dollar Falls

Federal Reserve Chair Jerome Powell finally communicated Wednesday that a rate cut could arrive at the September meeting if inflation and the labor market perform as expected.

The Fed opted to hold the interest rate steady at 5.25-5.5% for the eighth straight meeting in July, as widely predicted. While the decision was unanimous, Powell said there was a “real discussion” about the case for moving on interest rates at this meeting, although the strong majority supported a hold.

“The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate,” Powell said.

Fed’s Confidence In 2% Inflation Increases

“If we see inflation moving down quickly or more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting,” Powell said.

The Fed’s progress on inflation allows for a shift in focus, Powell said: “The job is not done on inflation, but we can afford to begin to dial back the restriction in our policy rate as part of a process.”

He acknowledged broader disinflation trends and said the labor market is unlikely to drive significant inflationary pressures.

Powell described the economy as neither overheating nor significantly weakening, characterizing it as normalizing. He conveyed increased confidence in the path toward achieving the 2% inflation target.

The Fed is well-prepared to address potential economic weaknesses with the policy rate at 5.3%, providing ample room to respond, though conditions do not indicate such weaknesses, he said.

Addressing concerns about the timing of rate cuts potentially influencing the upcoming election, Powell said the Fed’s decisions are apolitical and based solely on data, the economic outlook and the balance of risks.

When questioned about a possible 50-basis-points cut, Powell said it is not under consideration.

Market Reactions: Gold Rallies, Dollar Retreats, Tech Stocks Rise

Powell’s remarks intensified the already heightened market speculation that the Fed will initiate its rate cut cycle in September and potentially proceed at a fast pace thereafter.

Traders not only fully price in a September rate cut, but assign a 15% probability of a 50-basis-point cut, which represents a jump the odds from 10% before Powell’s comments Wednesday. Market participants now anticipate three rate cuts by the end of the year, according to CME Group‘s FedWatch Tool.

The U.S. dollar index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, dropped 0.4% to 104 levels. In contrast, gold prices surged 1.2%, with the commodity reaching $2,440 per ounce. The dollar also fell 1.9% against the Japanese yen, hitting a four-month low.

Yields on the policy-sensitive two-year Treasury note declined by 7 basis points to 4.29%, setting the stage to close at the lowest levels since late January.

Wall Street responded positively, with indices reaching session highs following Powell’s press conference. The tech-heavy Nasdaq 100, as tracked by the Invesco QQQ Trust QQQ, was up 2.8% at 3:30 p.m. ET. The S&P 500 rose 1.4%, while the Russell 2000 increased by 1.2%.

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Photo courtesy of the Federal Reserve.