US Fed Chair Jerome Powell’s speech at the Jackson Hole symposium included subtle hints about a rate cut as soon as the next meeting in September. Powell said there was some scope for policy adjustments as the jobs market is weakening. However, inflation remains a key concern and may rise in the coming months due to tariffs.
Following Powell’s speech, the US benchmark 10-year treasury yields crashed 1.7 per cent, while the dollar index fell about a per cent. On the other hand, equity indices Nasdaq, Dow Jones and S&P 500 jumped up to 2 per cent, indicating the market was pricing in a rate cut next month.
What Powell said at Jackson Hole
In his eighth and final speech as Fed Chair at the annual huddle, Powell said the Fed is facing a challenging situation and its framework warrants it to balance both sides of its dual mandate to foster maximum employment and stable prices.
He said that while the risks to inflation are high and the jobs market is also showing some signs of weakness, the shifting balance of risks may warrant adjusting the policy stance.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labour market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” said Powell.
Powell underscored that the jobs market slowdown is bigger than earlier assessed. However, he added that the situation was not alarming.
The effect of higher tariffs has started to be visible. While the effect of tariffs will accumulate over the coming months, Powell highlighted that there is much uncertainty about whether these price rises will likely significantly raise the risk of an ongoing inflation problem.
How Powell’s rate cut indication may affect the Indian rupee, bonds on Monday
Powell’s dovish tone is expected to exert pressure on the US dollar. This would mean the Indian rupee may see an uptick. Consequently, bond yields may slip.
“The macro outlook should convince the Fed to cut rates at the September 17th meeting. The hint of upcoming rate cuts will tamp down US bond yields and bolster markets in the near term. But looking out on the horizon, structural shifts in the economy have created uncertainty about the long-run fed funds rate. Suffice it to say, the neutral rate will be higher than during the 2010s,” said Jeffrey Roach, Chief Economist for LPL Financial.
According to Vishal Goenka, Co-Founder of IndiaBonds.com, Powell’s rate cut signals may be followed by weakness in the US dollar and will help cushion the recent pressure on the Indian rupee (INR).
Goenka said the Fed’s rate cut in September will actually open the door for the RBI to follow suit in the face of slowing credit and economic growth.
However, tariff worries and strong dollar demand from importers may make it difficult for the rupee to rise significantly.
“A softer Fed usually weakens the dollar, and that should be good news for the rupee. But India’s reality is more layered. Heavy demand for dollars from importers and tariff worries have kept the rupee hovering near ₹87.50. Powell’s words offer medium-term relief, yet in the short run, we should brace for swings rather than a clean upward move,” said Ajay Kumar Yadav, CFP, Group CEO & CIO, Wise Finserv.
Yadav underscored that foreign investors have been net buyers of Indian government bonds, positioning for easier global liquidity. That should nudge yields lower and create capital gain opportunities, especially in long-duration bonds.
“For investors, a barbell strategy, mixing short-term and long-term paper, remains a smart way to capture both stability and upside,” said Yadav.
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