The U.S. stock market finished sharply higher Friday, sparked by Federal Reserve Chair Jerome Powell’s strongest signal yet that interest rate cuts are coming. “The time has come for cuts,” Powell said at the Jackson Hole Economic Symposium, increasingly confident that inflation will return to the central bank’s 2% target. Recently, signals including a weaker than expected July jobs report have bubbled up, potential signs the Fed’s slowdown is working. Powell pointed to recent progress on inflation. “My confidence has grown that inflation is on a sustainable path back to 2%,” he said. A rate cut in September is all but assured. After attacks on Powell and company for being late to raise rates in response to the Covid inflation surge, his remarks underscore how Fed officials are hoping to avoid another policy error.
For the week, the Dow Jones average jumped nearly 1.3%, the Nasdaq Composite added 1.4%, and the S&P 500 gained 1.5% after all three benchmark indexes gained more than 1% on Friday, and the Dow Jones and S&P scored their second highest closes ever.
Future Wealth’s View
Officials from three of the world’s major central banks on Friday signaled they are firmly on course to lower or continue lowering interest rates in the coming months, marking the beginning of the end for an era of high borrowing costs as the global economy slips out of the grip of inflation. By the end of Powell’s speech, the VIX (Volatility Index) dropped to 15 after hitting a high of 65 on Aug 5.
The return to calm is creating new riches on Wall Street. But, the economy is still on the path for further slowdowns and the unemployment rate is rising. Payroll additions are falling below estimates and the number of jobs lost is steadily increasing. The Fed cut next month will likely be followed by a few more before the end of the year but the effects of those cuts will not be felt till mid 2025.
There is a misconception that a drop in the inflation rate translates to lower prices. The inflation rate being reported represents a year over year increase and a 2.9% inflation in August 2024 tells us is that the price of a product that cost $1 a year ago in August 2023 is now 2.9% percent higher. But, the same $1 product in August 2023 was $0.93 in August 2022 because inflation was running hot at 8% by August 2023. On average, the effect of inflation over the past two years means we are paying over 10% more for products and services.
The only investments that offset those high inflation numbers are from the stock market. Money market and CDs are simply not keeping up with inflation and there are still trillions of dollars parked in those investments, losing value everyday.