Stock Market Surges as Powell Signals Imminent Rate Cuts

The stock market saw a significant boost on Friday, following Federal Reserve Chair Jerome Powell’s announcement that the time has arrived to begin cutting interest rates. This declaration marks the clearest indication yet that the Federal Reserve is prepared to initiate an easing cycle, which could have far-reaching effects on the economy.

The announcement had an immediate positive impact on major stock indexes. The S&P 500 rose by 1%, the Dow Jones Industrial Average increased by 0.9% (adding over 300 points), and the tech-focused Nasdaq Composite led the charge with a gain of approximately 1.5%. These gains helped the indexes recover strongly from Thursday’s closing losses.

Investors had been eagerly awaiting Powell’s remarks at the Kansas City Federal Reserve’s annual economic symposium in Jackson Hole. With the anticipation of rate cuts building throughout the week, Powell’s comments confirmed market expectations. Powell indicated that policy adjustments are needed, with the direction and timing of these adjustments depending on incoming economic data, the evolving economic outlook, and the balance of risks.

This stance from the Federal Reserve comes at a time when slowing economic data has convinced many market participants that rate cuts are necessary. Expectations are high that the Federal Reserve will announce a rate cut at its upcoming meeting on September 17-18. Currently, market analysts are divided on the extent of the cut, with some predicting a 25-basis point reduction and others suggesting a 50-basis point cut. According to CME’s FedWatch tool, there is a 70% probability of a 25-basis point cut and a 30% probability of a 50-basis point cut.

Following Powell’s speech, the benchmark 10-year Treasury yield dropped to approximately 3.8%, nearing its lowest levels of the year. This decline reflects the market’s reaction to the expected shift in monetary policy.

Lower mortgage rates, influenced by the anticipated rate cuts, have had a notable effect on the housing market. Sales of new homes surged by 10.6% in July, reaching a seasonally adjusted annual rate of 739,000 units. This figure is up from June’s revised rate of 668,000 units and significantly higher than Bloomberg’s consensus forecast of 623,000 units. The increase in new home sales indicates that lower interest rates are making it more attractive for homebuyers, easing some of the affordability challenges that have been prevalent in the housing market for the past two years.

In recent weeks, 30-year mortgage rates have fallen below 7%, marking the lowest levels since May 2023, although they are still double the rates seen three years ago. The drop in mortgage rates has provided builders with an advantage, allowing them to offer more appealing rates to potential homebuyers, which the existing home market and smaller private builders struggle to match.

Despite the overall positive trends, some potential buyers remain cautious, waiting for rates to drop even further. Data from the Mortgage Bankers Association indicates that applications to purchase homes decreased by 5% last week, reaching their lowest level since February. Meanwhile, builders have continued to increase the supply of new homes, with inventory levels reaching 462,000 units in July. At the current sales pace, this inventory would last seven and a half months, slightly above the six-month level considered to represent a balanced market.

As mortgage rates decline, home prices have remained resilient. The median sales price for a new home increased to $429,800 in July, up from $416,700 in June. This rise suggests that while lower rates may boost demand, they have not yet led to a significant decrease in home prices.

With Powell’s clear signal that the Federal Reserve is ready to reduce interest rates, the market is now closely monitoring economic data and upcoming Federal Reserve meetings. These developments will shape the pace and magnitude of future rate cuts, influencing both the broader economy and specific sectors like housing in the coming months.