Markets Slip as Fed Holds Rates Steady and Powell Dampens Hopes for September Cut – US Market Wrap
Wall Street’s hopes that the Federal Reserve would signal imminent rate cuts were mostly dashed Wednesday, with stocks and bonds falling to cap an otherwise strong month for risk assets. Microsoft and Meta Platforms both jumped in the late hours following their earnings.
An initially calm investor reaction was broken when Fed Chair Jerome Powell stated that no decision on easing policy had been made for September. The US labour market “looks solid,” he said, while inflation remains above target, statements that traders interpreted as undermining the case for an impending rate cut.
The S&P 500 fell 0.1% as equities reversed gains. US two-year yields rose seven basis points to 3.93%. While the coordinated pullback in stocks and bonds appeared mild, it was the worst Fed day since December. The dollar rose for the fifth consecutive session, its longest advance since February. Copper fell as Trump’s tariffs excluded refined metals.
While Trump has pushed for an immediate rate cut, investors in risk assets have largely reduced their expectations of a Fed pivot anytime soon. Instead, they’re banking on strong economic growth, an AI-driven earnings boom, and the belief that tariffs will only cause manageable goods inflation while keeping services inflation under control.
Even though the declines in stocks and bonds reflected revisions to market expectations, Powell made another deliberate effort to portray the central bank as being in a good position to assess the economy as it develops.
Even as he and the Fed’s communique indicated a slight slowdown in growth, Powell repeatedly stated that policymakers have plenty of time to assess the impact of Trump’s evolving tariff policy and other data in the future.
The Federal Open Market Committee voted 9-2 on Wednesday to keep the benchmark federal funds rate at 4.25%-4.5%, as it has at all of its meetings this year. Governors Christopher Waller and Michelle Bowman voted against the decision, favouring a quarter-point cut.
Money markets have reduced their expectations for rate cuts this year, with traders now seeing less than a 50% chance of one in September. The odds of a reduction in October have dropped to around 85%, whereas it was fully priced in before Powell spoke.
US employers increased hiring in July, though the pace was consistent with weaker labour demand. ADP Research data show that private-sector payrolls increased by 104,000. The median economist estimate was for a 76,000 gain.
The Bureau of Labour Statistics’ July employment report, which includes government positions, is expected to show that job growth moderated while unemployment increased.
Inflation-adjusted GDP, which measures the value of goods and services produced in the United States, increased by an annualised 3% in the second quarter, according to preliminary government data released Wednesday. Despite the strong pace, economic growth averaged 1.25% in the first half, a percentage point lower than the pace for 2024.
