Markets cheered a dovish Jerome Powell on Friday, but the outlook is still unclear.
SPX 500 – Daily Chart
The SPX 500 closed the week at the highs, and the week ahead could see another push to new levels.
The SPX 500 surged on Friday after Federal Reserve Chair Jerome Powell opened the door to interest rate cuts. The reaction does seem a bit overdone as he has only hinted at a cut in September, but the drop in the U.S. dollar this year has already priced in substantial cuts. The central banker has also been under heavy pressure from U.S. President Trump in recent months to reduce the country’s interest rates.
Powell said “shifting” economic risks have sharpened the case for a Federal Reserve rate cut, as the jobs market was cooling and Trump’s tariffs were adding to inflation.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” said Powell at the Federal Reserve’s economic summit in Jackson Hole, Wyoming, on Friday.
The remarks were seen as a dovish switch and signal he may support a quarter-point cut at the bank’s next meeting in September.
The outlook is still a bit clouded as Powell acknowledged the effects of the country’s trade war on consumer prices were now “clearly visible”, but said their impact would endure and would instead prove a one-off shock that can be ignored.
“Given that the labour market is not particularly tight and faces increasing downside risks, that outcome does not seem likely,” said the Fed chairman.
He added that “risks to inflation are tilted to the upside, and risks to employment to the downside, a challenging situation”.
The stock market saw it as a green light, and stocks soared near their recent highs in the top 500 shares. The week ahead will be used to determine how strong the market can be ahead of the September rate meeting.
