Powell Damps Rate Cut Hopes, Sending Treasury Yields Surging
Fed Chair's cautious tone on a December move sparks a Treasury sell-off and splits stock indices, with the Dow and S&P 500 falling while the Nasdaq hits a new record.
Federal Reserve Chair Jerome Powell poured cold water on investor hopes for a year-end interest rate cut, sparking a sharp sell-off in government bonds and delivering a mixed verdict across Wall Street's main stock indices.
In comments following the central bank's latest policy meeting, Powell signaled that a December rate cut is "far from certain," a remark that promptly recalibrated market expectations. The immediate reaction saw the Dow Jones Industrial Average close down 0.2% and the S&P 500 finish fractionally lower. The 10-year U.S. Treasury yield, a key benchmark for borrowing costs across the economy, jumped 8 basis points to 4.07% as traders dumped government bonds.
In a surprising divergence, the tech-heavy Nasdaq Composite bucked the trend, rising 0.6% to a new closing record, suggesting investors in the sector are looking past the near-term monetary policy uncertainty.
The Fed chair's cautious language directly addressed the market's aggressive pricing for an imminent policy pivot. Powell noted there were "strongly differing views" among policymakers about the path forward, emphasizing that a potential December cut "is not a foregone conclusion—far from it."
This verbal intervention caused a dramatic repricing in derivatives markets. The probability of a quarter-point rate cut in December, which stood at over 85% before Powell's press conference, plummeted to around 62%, according to data from the CME FedWatch tool. The U.S. Dollar Index, which measures the greenback against a basket of major currencies, climbed 0.63% on the day as expectations for looser monetary policy faded.
The market's reaction underscores the tension between investors eager for relief from high borrowing costs and a Federal Reserve that remains data-dependent and wary of persistent inflation. The central bank is navigating a complex environment, balancing signs of a cooling economy with inflation that has yet to definitively return to its 2% target.
"Powell's comments served as a reality check for a market that had perhaps gotten ahead of itself," said a strategist at a major investment bank. "The Fed is clearly not on autopilot and is reserving the right to hold rates steady if the data doesn't cooperate. The bond market felt that message loud and clear."
The resilience of the Nasdaq suggests that enthusiasm for technology stocks, potentially driven by strong earnings or secular growth trends like artificial intelligence, can at times override broader macroeconomic headwinds. However, the decline in the more economically-sensitive Dow and S&P 500 indicates that concerns over the future path of interest rates remain a dominant theme for the wider market.
Investors now face a period of heightened uncertainty heading into the final months of the year. With the Federal Reserve signaling a more measured and divided approach, market participants will be scrutinizing every piece of incoming economic data for clues on the central bank's next move.