Investors brace for Fed's September decision
US Treasury yields moved lower Friday after Federal Reserve chairman Jerome Powell signaled that interest rate cuts could be approaching, remarks that investors interpreted as a shift toward looser monetary policy.
The 10-year Treasury yield dropped more than 7.5 basis points to 4.256%, while the 2-year yield declined 10 basis points to 3.69%. One basis point equals 0.01%. Yields and prices move in opposite directions.
Speaking at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, Powell said financial conditions “may warrant” interest rate decreases. He emphasized that the central bank was proceeding “carefully” with its policy decisions.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said.
Markets quickly priced in stronger odds of a rate reduction. The CME Group’s FedWatch tool showed traders assigning a more than 91% probability of a September cut, up from earlier in the week.
“Powell’s dovish Jackson Hole comments suggest the Federal Reserve is ready to cut interest rates in September, which is just what investors were hoping to hear, given the recent slowdown in the labor market,” David Laut, chief investment officer at Abound Financial, told CNBC. “While there is still one more employment report before the September meeting, it’s clear the Fed has enough data under its belt to justify a September cut.”
Treasury yields had risen earlier in the week as markets braced for Powell’s speech. The Wall Street Journal reported that by Thursday, investors were expecting little overt support for rate cuts, citing resilient economic activity and inflation still above the Fed’s 2% target. The 10-year yield at that point had climbed to 4.329%, and the 2-year yield stood at 3.791%.
US economic indicators have shown mixed signals in recent weeks. A stronger-than-expected services and manufacturing reading from S&P Global, which reported the US Composite PMI at 55.4 in August compared with 55.1 in July, pointed to ongoing expansion. At the same time, weekly jobless claims rose to 235,000, above economists’ forecasts, according to the Labor Department data.
Analysts said Powell’s remarks suggest the Fed is shifting its focus from solely fighting inflation to balancing risks between price stability and employment. Investors were waiting for confirmation that rate cuts are on the table, and Powell provided exactly that, said Frank Walbaum, market analyst at Naga, in a note cited by the Journal.
Still, some strategists cautioned against overconfidence. ING economists noted that demand for a 20-year Treasury auction earlier this week was not great, signaling that investors remain cautious about long-term debt markets.
The 30-year Treasury yield ended Friday at 4.893%, while shorter-term instruments also edged lower. The 1-month Treasury yield was at 4.356%, and the 6-month yield stood at 4.058%.
The Fed’s next meeting is set for September, where investors and policymakers will weigh the latest labor market and inflation data before deciding whether to move forward with the first rate cut since 2020.
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