Stocks Rise As Powell Says Fed Ready For Rate Cut
Stock markets jumped on Friday as US Federal Reserve chief Jerome Powell made clear that the central bank was ready to cut interest rates, a message investors had been longing to hear.
The dollar, which performs better when borrowing costs are higher, fell against the euro, the pound and the yen, which also strengthened after Bank of Japan chief Kazuo Ueda signalled that Japanese rates could rise again.
Investors had been on tenterhooks all week in anticipation of a key speech by Powell at an annual gathering of central bankers in Jackson Hole, Wyoming.
Traders were hoping that Powell would leave no doubts that a rate reduction was on the way after data earlier this month raised recession fears and rocked the markets. The next Fed rate decision is on September 18.
Powell did not disappoint.
"The time has come for policy to adjust," he said, adding that his confidence had grown that inflation was on a "sustainable path back" to the Fed's two-percent inflation target.
"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," he said.
Data released this week showed a robust US services industry but also a rise in jobless claims and a cooler-than-expected labour market.
The Dow and broad-based S&P 500 were each up around one percent following the speech while the tech-heavy Nasdaq gained 1.3 percent. All three had closed in the red Thursday.
Europe's main stock markets closed higher.
The Fed has kept its rates at a 23-year high after raising them to between 5.25 and 5.50 percent in efforts to combat inflation, which has cooled, while central banks in Europe have started to cut theirs.
Speculation has been rife about how big, or small, the first US cut might be, and Powell did not go into specific details about the upcoming move.
Many analysts expect a reduction of a quarter-percentage-point but some traders hope for as much as half a point.
"Some investors may have hoped for clarity as it pertains to the size of rate cuts, but that was always going to be a long shot," said Bret Kenwell, US investment analyst at eToro trading platform.
"Ultimately, Chair Powell delivered what the market was craving, which was certainty regarding the Fed's monetary policy moving forward, opening the door to the first rate cut in more than four years," Kenwell said.
While other major central banks are easing their rates, the Bank of Japan made its second hike in 17 years in late July, a move that caused the yen to rise and contributed to a market rout.
Ueda told Japanese lawmakers on Friday that the BoJ could hike rates again if inflation and the economy performed as expected, and the yen rose against the dollar following his remarks.
A stronger yen makes it less attractive for investors who use the cheaper currency to buy higher-yielding assets such as stocks, a practice known as "yen carry trade".
The last rate hike caused investors to unwind such trades.
Tokyo and Shanghai closed higher on Friday but Hong Kong fell.
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