Stocks surged higher on Friday as Federal Reserve Chair Jerome Powell signaled an interest rate cut could be on the way.
The Dow rose 860 points, or 1.93%. The broader S&P 500 gained 1.6% and the tech-heavy Nasdaq Composite gained 1.95%.
The Dow was on track to close at its first record high since December 4.
Investors across the globe were attuned to Powell’s speech at an annual central banking forum in Jackson Hole, Wyoming. Markets cheered his remarks that a shift in interest rate policy may be needed — though any rate cut would be in response to slowing growth in the labor market.
“The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said.
“Downside risks to employment are rising,” he said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
“Investors are enthusiastic that the Fed will likely resume its easing cycle next month,” José Torres, senior economist at Interactive Brokers, said. “Lighter rates are bolstering trader sentiment and widening the path for a broader rally into year-end.”
The Fed has held its benchmark interest steady since December. A Fed rate cut would lower savings and borrowing rates, boosting spending and investing while stimulating business activity, creating a sustained tailwind for the stock market.
A rate cut can also lower bond yields, making higher-yielding assets like stocks more appealing for investors.
“Powell’s dovish Jackson Hole comments suggest the Federal Reserve is ready to cut interest rates in September, which is just what investors were hoping to hear, given the recent slowdown in the labor market,” David Laut, chief investment officer at Abound Financial, said in an email.
“The stock market tends to favor lower interest rates and since Powell hinted at the likely prospect of a September cut, we expect the market’s bullish trend to continue over the short term,” Laut said.
Wall Street had been divided on whether Powell would hint at rate cuts or note that uncertainty about inflation gives credence to a wait-and-see approach.
Stocks and bonds rallied sharply Friday as traders digested Powell’s remarks that cuts are likely on the way.
The 2-year, 10-year and 30-year Treasury yields all fell as investors snapped up bonds to lock in high rates ahead of a potential Fed rate cut in September.
“Fed Chair Powell has clearly opened the door for a 0.25% rate cut at the September FOMC meeting, largely predicated on the recent cooling in the labor market,” Chip Hughey, managing director for fixed income at Truist Advisory Services, said in an email.
Yields and prices trade in opposite directions. If the Fed is expected to cut rates, investors will snap up bonds to secure the current high rates, pushing yields lower.
“Stocks are surging and the yield curve is plunging as Chair Powell points to potential rate cuts around the corner,” Torres said.
Traders are now pricing in an 91% chance the Fed cuts rates in September, up from a 75% chance before Powell began his remarks.
Meanwhile, Wall Street’s fear gauge, the CBOE Volatility Index, sank 11.5%, signaling relative calm in markets. The US dollar index, which measures the dollar’s strength against six major foreign currencies, fell 0.75% on expectations for rate cuts and signs of slowing economic growth.
