Markets rose Friday after Federal Reserve Chair Jerome Powell appeared to open the door to lowering interest rates, something analysts say would help boost overall activity in the U.S. economy but at the risk of spurring inflation.
The S&P 500, one of the broadest index of stocks, climbed 1.6%, while the tech-focused Nasdaq increased 2% and the 30-stock Dow Jones Industrial Average jumped just over 2% as of midday Friday. The gains ended a multiday losing streak that had begun to spark fears of a more sustained pullback by investors amid ongoing economic uncertainties. Investors also cheered an announcement by Canada that it would drop many retaliatory tariffs on U.S. goods.
In a closely watched speech Friday, Powell said the Fed’s benchmark lending rate, which has been unchanged since December, was “restrictive,” meaning it may be holding back consumption and investment. By making it cheaper for consumers and businesses to borrow money, the Fed can help spark economic growth.
“Softer borrowing costs bolster trader confidence and widen the path for a broader rally going forward,” José Torres, senior economist at Interactive Brokers financial group, said of the speech and its effect on the stock market.
The Fed has thus far been hesitant to make that change out of concerns about lingering inflation.
The central bank is tasked by Congress with keeping inflation and unemployment low, a mandate that requires it to be careful not to overly accelerate or slow down the economy with its interest rates. Powell said Friday that while the economy was now facing the prospect of both higher inflation, in part from President Donald Trump’s tariffs, and weakening employment, there had been a “shifting balance of risks” toward labor market deterioration. Officials said this month’s unexpectedly weak jobs report — one that caused Trump to fire the head of the Bureau of Labor Statistics — may have helped solidify the case for the first rate cut of Trump’s second presidential term.
“He used the speech to solidify expectations for 25 basis points in September,” James Bullard, former president of the St. Louis Fed, said in an interview on Bloomberg Television Friday, meaning that he expects the Fed to cut interest rates by a quarter of a percentage point. The rate currently stands at about 4.25%. “He leaned into the most recent labor market report, which was very soft. And so I think that’s a done deal.”
The large upward move in stocks Friday suggested Powell’s openness to a rate cut took investors by surprise. In the run-up to the speech, commentators said they expected Powell to take a more cautious approach about the central bank’s next rate move, citing his prior remarks and more recent ones by Fed officials seen as close allies that stressed the ongoing risk of worsening inflation, especially from Trump’s tariffs.
“Chair Powell’s Jackson Hole speech leaned more dovish than we expected,” analysts with Deutsche Bank said in a note Friday, referring to an investor phrase for a central bank’s willingness to lower rates. “As the speech made clear, downside risks to the labor market have risen in Powell’s view following the last jobs report, which showed substantially cooler job gains following surprisingly large downward revisions.”
Powell’s speech “was reigniting animal spirits in markets,” Interactive Brokers’ Torres said. While there is no guarantee that cheaper borrowing will immediately lead to more jobs, stocks tend to benefit in such a scenario.
“Softer borrowing costs bolster trader confidence and widen the path for a broader rally going forward,” he said.
