Federal Reserve Chair Jerome Powell on Wednesday signaled the central bank is prepared to deliver two additional interest rate cuts before the end of 2026, sending the dollar into a sharp decline and Treasury yields tumbling across the curve.
Speaking at a banking conference in New York, Powell cited "meaningful progress" on inflation while acknowledging that labor market conditions remained "resilient but cooling" — language markets interpreted as clearing the path for easing later this year.
The 10-year Treasury yield fell 11 basis points to 4.31%, its sharpest single-day decline since March. The DXY dollar index dropped 0.8%, bringing its year-to-date loss to nearly 4%.
Market Reaction
Equity markets cheered the news. The S&P 500 climbed 0.9% to a fresh record of 5,308, while the Nasdaq Composite added 1.1%. Rate-sensitive sectors — utilities, real estate, and small-cap stocks — outperformed broadly.
Emerging market currencies were among the biggest beneficiaries. The South African rand, Nigerian naira, and Kenyan shilling all gained more than 1% against the dollar, a meaningful relief for countries that have been managing external debt denominated in hard currencies.
Gold rose 0.4% to $2,341 per troy ounce on the softer dollar, while oil was little changed.
What Powell Said
Powell's remarks were notably more dovish than his previous public appearances, which had struck a "higher for longer" tone through most of the first quarter.
"The disinflation process is proceeding in a manner broadly consistent with our expectations," Powell said. "We remain data-dependent, but the trajectory gives us confidence that further normalization is appropriate."
Fed funds futures are now pricing in a 78% probability of a rate cut at the September meeting and a 65% probability of a second cut in December.
Economists React
Not all economists are convinced the pivot is warranted. Several inflation hawks noted that services inflation remains elevated at 3.8% annually, and that cutting rates before core PCE returns to target risks reigniting price pressures.
"We're at risk of declaring victory too soon," said one economist at a major investment bank, noting parallels to the 1970s stop-start monetary policy cycle.
Powell, however, appeared to anticipate this concern, emphasizing that any cuts would be "measured and conditional" rather than the beginning of a rapid easing cycle.
For now, markets have chosen to hear what they wanted to hear — and are pricing accordingly.