Federal Reserve Chair Jerome Powell delivered a clear message on Friday: the time for lower interest rates has arrived. His comments during the Jackson Hole symposium marked a significant shift from previous warnings about economic pain, signalling a likely rate cut in September.
This announcement led to a strong response in financial markets. All three major U.S. equity indexes closed near record highs, with the S&P 500 and Dow Jones Industrial Average showing substantial gains. Meanwhile, U.S. bond prices surged, and the dollar weakened to its lowest level in over a year.
Impact on Stocks and Bonds
The stock market, particularly rate-sensitive sectors, saw a notable rally. Small-cap stocks and real estate components within the S&P 500 led the charge. However, the future performance of small-caps may hinge on the Fed’s rate decisions and the broader labour market’s health.
On the bond side, investors are seizing the opportunity to lock in yields before potential rate cuts. With the 10-year Treasury yield currently below its peak, now might be an opportune time to diversify into corporate bonds and mortgage-backed securities.
Looking Ahead in Interest Rates
As the market anticipates the Fed’s next move, investors will be closely watching upcoming events, including earnings from AI-driven companies like Nvidia and revised GDP data. The coming week could provide further insights into the economic outlook and the potential impact of interest rate cuts.
