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Powell signals September rate cut, keeps size uncertain
U.S. treasury yields fall as markets price in aggressive Fed cuts
Treasury 2-year yield dips 8 bps to 3.93% as markets react
Dollar weakens further amid expectations of 100 bps in rate cuts this year
Powell focuses on labor market, signaling no push for further cooling
Fed Chair emphasizes flexibility in timing and size of cuts based on evolving data
Federal Reserve Chair Jerome Powell firmed expectations for a rate cut at the September meeting but left the scope of the move open, highlighting the central bank's data-dependent approach. Speaking in Jackson Hole, Powell indicated that while policy adjustments are imminent, the scale and timing will hinge on incoming economic indicators and the evolving outlook.
"The direction of travel is clear," Powell stated, "but the pace and magnitude of rate cuts will be dictated by incoming data, the evolving outlook, and the balance of risks." His comments underscore a shift in the Fed's focus toward labor market conditions, a notable change from last year's emphasis on inflation control.
Labor market now a key factor
Powell’s remarks reflect a growing concern over labor dynamics, suggesting the Fed is prioritizing employment stability alongside inflation management. "We do not seek or welcome further cooling in labor market conditions," Powell noted, marking a dovish tilt in the Fed's stance. This aligns with inflation swaps indicating headline CPI could drop below 2.5%, placing the PCE deflator near the Fed’s 2% target.
Market reaction: Yields drop, Dollar weakens
In response, U.S. Treasury yields fell, with the 2-year yield down 8 basis points to 3.93%. The dollar also faced renewed pressure as traders increased bets on a total of 100 basis points in cuts this year. Market participants now largely expect at least one 50 bps cut over the next three meetings, consistent with Powell’s cautious yet flexible approach.
Dovish but ambiguous
While Powell avoided terms like "gradual" or "methodical"—buzzwords often used by other Fed officials to describe the rate-cut trajectory—his tone suggested a more dovish approach. Despite confirming the Fed’s shift towards easing, Powell provided little clarity on the exact timing or size of future cuts, leaving markets to speculate on the path forward.
The Fed’s next steps remain data-driven, and the uncertainty around the pace of cuts continues to keep markets on edge.
