Stocks rose on Friday as Federal Reserve Chair Jerome Powell indicated that long-awaited interest rate cuts are on the horizon. The Dow closed 462 points higher, or 1.1%, while the S&P 500 and Nasdaq Composite also posted gains. Powell stated in a key economic summit in Jackson Hole, Wyoming that it was time to adjust policy, with rates currently at a 23-year high. As a result, the labor market has cooled enough not to pressure inflation higher and the central bank does not want to see more weakening in job market conditions.
The strong signal from Powell has led many analysts to believe that a rate cut in September is inevitable, with the possibility of further cuts in the coming months. The key question is whether this will be a one-time cut or the start of a larger cutting cycle, which will be determined by economic data over the next few months. Minutes from the Fed’s July meeting indicated that the majority of the Federal Open Market Committee would support lowering rates in September if inflation continues to slow down, emphasizing the Fed’s data dependency and lack of a preset path.
Concerns about the softening labor market have also been raised, with recent data showing weaker job growth than previously estimated in the months leading up to March. As job growth has slowed more than anticipated, the fears of an economic slowdown have led investors to expect rate cuts in September, as well as in November and December. However, some investors believe a half-point cut next month is unlikely, as it could signal a recession.
Despite initial fears of an economic downturn earlier in August, recent reports suggested a softer landing scenario, where the Fed brings down inflation without triggering a recession. Data on sales of previously owned homes in the US showed a 1.3% growth last month, breaking a four-month streak of declines. Target shares surged 10% after reporting strong quarterly profits, while Macy’s shares fell after a drop in sales and lowered revenue guidance. Boeing’s shares also faced challenges after finding issues in a structural component of its long-delayed 777X aircraft.
Gold futures reached a record high price before retreating, reflecting uncertainty in the markets. While there has been some optimism about the direction of the economy, analysts caution against mistaking the current soft patch for a recession. Growth scares are part of the economic cycle, and it is important to monitor data and economic indicators in the coming months. As stocks settle after the trading day, levels may fluctuate slightly based on market conditions.
