Global stocks surge on optimism of Fed rate cut

The time has come to cut interest rates, US Federal Reserve Chair Jerome Powell says

Television screens at the New York Stock Exchange show Federal Reserve Chairman Jerome Powell. AP

Wall Street and global shares surged on Friday after US Federal Reserve Chairman Jerome Powell gave his strongest indication yet that the US central bank is on the cusp of cutting interest rates.

Mr Powell said at the economic symposium in Jackson Hole, Wyoming, that “the time has come” to cut interest rates as rising risks to the job market left no room for further weakness and inflation was in reach of the Fed’s 2 per cent target, suggesting an endorsement of an imminent policy easing.

On Wall Street, the Dow Jones Industrial Average rose 1.14 per cent to 41,175, the S&P 500 gained 1.15 per cent to 5,634 – near an all-time high – and the Nasdaq Composite was up 1.47 per cent to 17,877.

The Bloomberg Magnificent Seven gauge of megacaps rose 1.7 per cent. The Russell 2000 of small firms jumped 3.2 per cent.

“Although Jerome Powell’s comments have brought a lot of excitement for traders, even though many expected the Fed to say that the time has come to make adjustments, it shows how deprived the market has been due to high interest rates,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.

“His comments on interest rate cuts have boosted confidence among traders and investors, supporting the equity markets and causing a decent reaction in gold prices.

“We think what he said today only matters to some extent, as it is the US non-farm payroll data that is really going to drive the narrative among traders. This is because the Fed has confirmed that they are not expecting any further weakness in the labour market, and if the next month’s US NFP data shows any signs of an echo from the last month, you could pretty much think that the interest rate cuts in September are going to be more than 25 basis points, especially given the fact that the Fed is not comfortable with the inflation progress.”

While Mr Powell offered no further clues on the pace of rate cuts, his remarks at the annual gathering of central bankers cemented expectations of a rate cut when the Fed holds its next two-day meeting in September.

Markets had already locked in a September rate cut, an initial cut of 25 basis points after Mr Powell's remarks.

His remarks also marked the beginning of a phase in the Fed's quest to restore price stability, following the 2022 post-pandemic inflation surge.

The Fed began raising rates that year up its target range from near-zero to its current range of 5.25 to 5.50 per cent. The Fed has held rates steady for more than a year.

The Fed's preferred inflation metric has since fallen from its 2022 peak of 7.1 per cent to its current 2.5 per cent level, not far off from its 2 per cent target.

Europe’s broad Stoxx 600 index rose about 0.5 per cent, clocking a weekly advance for the third week in a row.

Japan's Nikkei gained 0.4 per cent as investors digested inflation data and remarks from Bank of Japan Governor Kazuo Ueda flagging a willingness to raise interest rates if the economy and inflation turn out as forecast.

Traders increased bets for a bigger rate cut in September following Mr Powell's speech, with the Fed Funds futures now pricing in a 37 per cent chance of a 50 basis point cut next month, up from about 25 per cent on Thursday. Traders are also pricing in about 106 bps of cuts by the end of the year.

US Treasury yields fell across the board. The yield on benchmark US 10-year notes fell 5.9 basis points to 3.803 per cent. The 2-year note yield, which typically moves in step with interest rate expectations, fell 9.7 basis points to 3.9132 per cent.

The dollar turned lower and sterling rose to its highest in more than two years on Friday.

Oil prices jumped more than 2 per cent, rebounding after losses earlier in the week.

Gold prices added about 1.1 per cent to $2,510 an ounce, near the record high of $2,513 hit on August 20.

With input from Reuters