Why Did the Markets Stall After Cheering Powell Rate Cut Signal?
Why Did the Markets Stall After Cheering Powell Rate Cut Signal?
By:Ilya Spivak
Stocks and the US dollar seesawed as markets cheered Fed Chair Powell at Jackson Hole, only to lose momentum.
- Stock and gold rose, yields and the US dollar fell as Powell spoke at Jackson Hole
- Markets hit a wall after loudly cheering rate cuts, cutting off dovish follow-through
- Sentiment seems fragile as US PCE inflation data, NVDA earnings loom ahead
Financial markets roared with approval as Federal Reserve Chair Jerome Powell delivered a much-anticipated speech at the US central bank’s annual Jackson Hole Symposium. Parsing through the carefully crafted wordsmithing, traders seemed to extract confirmation that an interest rate cut is indeed on the menu for next month.
Benchmark Fed Funds futures show that the probability of a 25-basis-point reduction when the policy-steering Federal Open Market Committee (FOMC) gathers on September 17 rose to 84.7% from 74.9% on the prior day. That marked a welcome respite after nearly two weeks on tenterhooks following inflation data released on August 12.
The markets cheered as Fed Chair Powell set the stage for a rate cut
Stock markets surged, with the bellwether S&P 500 and the tech-tilted Nasdaq 100 adding 1.5% apiece. Treasury bonds rose as borrowing costs fell across the yield curve. The two-year rate fell 2.43% while the 10-year lost 1.66%, hinting a sense of immediacy around stimulus speculation. The US dollar broadly fell while gold prices rose.
Powell said that risks to the labor market are rising while economic growth has slowed notably, reflecting a downturn in consumer spending. He then argued that, while the effects of tariffs on consumers are clearly visible and will accumulate in the coming months, it is a reasonable base case that the impact will be short-lived.
Nevertheless, the Fed Chair warned that policymakers cannot allow a one-time increase in the price level to become an ongoing inflation problem. He stressed that the central bank’s updated framework emphasizes a commitment to act forcefully to ensure longer-term inflation expectations remain well-anchored.
Stocks and the dollar seesaw as dovish speculation runs out of road
One day removed from the fireworks, a curious lack of follow-through seemed to be clearly on display. Wall Street limped lower Monday, with the S&P 500 down nearly 0.4%. Treasury bond yields inched higher, while the US dollar launched a spirited recovery, erasing more than half of its Powell-inspired drop against an average of major currencies.
What happened to the markets’ forceful post-Powell vigor, and why did it struggle for follow-through? September’s rate cut has been priced in with strongly better-than-even odds for months. Indeed, the view for 2025 reflected in futures pricing has hewed close to the 50bps in cuts that the Fed has forecasted from December since at least mid-May.
Meanwhile, the disparity between the central bank’s position and that of the markets beyond this year has only diverged further. Traders now price in 80bps in cuts for 2026, whereas the Fed has owned up to just 25bps. That leaves officials with plenty of room for a dovish pivot before they’ve caught up with the markets’ baseline.
Risk appetite seems fragile as US PCE inflation data, NVDA earnings loom ahead
This may help explain why prices across asset classes found only limited scope for a dovish reaction. The markets’ initial exuberance marked relief at having avoided the risk of a hawkish surprise at Jackson Hole, but without much novelty for speculators, that move was quick to fizzle.
This leaves stocks in a vulnerable and the US dollar poised to recover further if incoming news-flow undermines sentiment, especially if that comes by way of highlighting the yawning gap between traders’ appetite for easing beyond 2025 and that of the Fed. US PCE inflation data and an earnings report from Nvidia Corp (NVDA) take top billing.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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