Markets Weekly Outlook – Fed Chair Pivot Ignites Rally Ahead of US PCE and Japanese Inflation Data
Chair Powell’s Jackson Hole speech represented a marked shift in tone from the Fed’s July minutes earlier this week. The minutes suggested that most FOMC members saw the upside risks to inflation as “more salient” than the downside risks to inflation, but Chair Powell acknowledged today that the balance of risks “appears to be shifting”.
Chair Powell’s speech highlighted a tricky situation: inflation risks are rising, while employment risks are falling. He explained that when these goals conflict, the Fed’s approach is to balance both. He noted that interest rates are now much closer to a neutral level than they were a year ago, and the steady unemployment rate gives the Fed room to carefully consider any policy changes. However, since rates are already high, the changing economic outlook might require adjustments to policy.
Powell’s tone was more cautious (or “dovish”) than expected. He didn’t push back against the idea of a rate cut, keeping his options open. A key point was his reduced concern about inflation caused by tariffs, likely due to signs of a weakening job market. Markets reacted strongly to his comment about “shifting risks may warrant adjusting policy,” as many had feared he would take a more aggressive (or “hawkish”) stance.
As a result:
-Short-term bond yields dropped below 3.7%.
-The 10-year yield also fell, nearing 4.25%.
-The chances of a rate cut in September jumped back to 90%, up from less than 70% before his speech.
The dollar index dropped 0.96% to 97.66 after Powell’s comments. It had been around 98.7 earlier in the day.
The euro rose 1.06% to $1.1728, hitting $1.1742 at one point, its highest since July 28. The dollar weakened 1.08% against the Japanese yen, falling to 146.77.
The British pound gained 0.86%, reaching $1.3527. The Australian dollar climbed 1.14% to $0.6492.
In cryptocurrencies, Bitcoin jumped 4.10%, reaching $117,035.
Gold received a much needed shot in the arm rising close to the $3380/oz mark after Fed Chair Powell’s speech.
