Major U.S. stock indexes jumped on Wednesday after Federal Reserve Chairman Jerome Powell highlighted weakening U.S. economic indicators in congressional testimony, boosting the odds of an interest rate cut later this month.
The central bank’s monetary policy committee all but promised in June that its next adjustment to interest rates would be a cut, taking rates below the range of 2.25% to 2.5% achieved after nine increases over the past three years.
Many committee participants believed at the time that a reduction might be needed soon, Powell said in testimony prepared for the House Financial Services Committee, and since then “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.”
The blue-chip Dow Jones Industrial Average climbed 0.74% after Powell’s testimony was disclosed, while the broader S&P 500 added 0.71% and the tech-heavy Nasdaq composite rose 1%.
“Sometimes what central bankers don’t say is nearly as important as what they do,” said Mark Hamrick, senior economic analyst for Bankrate.com. “In the case of Powell’s remarks, he does nothing to dissuade investors from their all-in bets that an interest rate cut is coming. While he won’t necessarily say it, Powell understands that if investors were making the wrong bet on rates, there would be the potential for a nasty downdraft in stock prices.”
Trading in interest rate futures reflected a jump to 16% in the chances of a 50 basis-point cut at the Fed’s meeting on July 31, twice the typical size, along with an 84% chance of the Fed trimming rates at least 25 basis points. A rate reduction would buoy markets that have chafed under President Trump’s trade wars, and grant the chief executive an edge he has long sought.