The S&P 500 was 0.8% higher after U.S. Fed Chair Jerome Powell said in a highly anticipated speech that the time has come to lower its main interest rate from a two-decade high. The index is back within 0.9% of its all-time high set last month. The Dow Jones Industrial Average was up 322 points, or 0.8%, as of 1:29 p.m. Eastern time, and the Nasdaq composite was 1.1% higher.
U.S. Fed Chair Jerome Powell’s speech on August 23
Powell’s speech marked a sharp turnaround for the U.S. Fed after it began hiking rates two years ago as inflation spiralled to its worst levels in generations. The U.S. Fed’s goal was to make it so expensive for U.S. households and companies to borrow that it slowed the economy and stifled inflation.
While careful to say the task is not complete, Powell used the past tense to describe many of the conditions that sent inflation soaring after the pandemic, including a job market that “is no longer overheated.” That means the U.S. Fed can pay more attention to the other of its twin jobs: to protect an economy that has so far defied many predictions for a recession.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” But that second part of his statement held back some of the details that Wall Street wanted so much to hear.
Bank of Canada recent cuts
“Canadians are experiencing rate cut déjà vu today, as the Bank of Canada (BoC) slashed its trend-setting overnight lending rate by a quarter of a per cent. It’s the second rate cut in as many months from the central bank. It implemented its first on June 5, bringing an end to a prolonged, 11-month rate hold and officially putting Canada on track for lower borrowing costs.”
Read the full article: Making sense of the Bank of Canada interest rate decision on July 24, 2024
Impact on Treasury yields
Treasury yields had already pulled back sharply in the bond market since April on expectations the U.S. Federal Reserve’s next move would be to cut its main interest rate for the first time since the COVID crash in 2020. The only questions were by how much the U.S. Fed would cut and how quickly it would move.
A danger is that traders have built their expectations too high, something they’ve frequently done in the past. Traders see a high likelihood the U.S. Fed will cut its main interest rate by at least one percentage point by the end of the year, according to data from CME Group. That would require the U.S. Fed to go beyond the traditional move of a quarter of a percentage point at least once in its three meetings remaining for the year.
If their predictions are wrong, which has also been a frequent occurrence, that could mean Treasury yields have already pulled back too much since their decline began in the spring. That in turn could pressure all kinds of investments.
How the markets are responding
On Thursday, the S&P 500 fell to its worst loss in more than two weeks after Treasury yields climbed.
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