Markets Roar to Life as Powell Signals Potential Policy Pivot

Jerome Powell's latest testimony sends shockwaves through global markets—traders scramble as Fed chair hints at dovish turn.

The Powell Put

Traders are pricing in potential rate cuts by early 2026 as Powell acknowledges 'evolving economic crosscurrents.' Futures markets immediately priced in a 15% higher probability of policy easing within the next 12 months.

Crypto Correlation Breakout

Bitcoin ripped past $75,000 on the news—proving once again that digital assets trade more on liquidity expectations than actual adoption metrics. Altcoins followed with 20-30% gains across major exchanges.

Traditional Finance Whiplash

Bank stocks dipped while tech rallied—the classic 'bad news is good news' dance that Wall Street performs whenever the Fed hints at printing more money. Bond yields dropped 25 basis points in the sharpest move since March.

Because nothing says 'healthy economy' like markets cheering the possibility of renewed stimulus—just don't look at the inflation data.

Markets respond as Powell considers changing stance

Right now, interest rates are one full point lower than they were when Powell gave his last Jackson Hole speech in 2024. The current target range is 4.25% to 4.5%, where it’s been stuck since December. Despite that, unemployment remains low, giving the Fed room to wait. But on Friday, Powell said things are getting harder to predict, and the central bank is weighing whether its current policy is too tight.

“Conditions allow us to proceed carefully,” he said. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”

That line, “may warrant adjusting,” was enough for Wall Street to believe a cut is coming. The yield on the 2-year Treasury note, often tied to interest rate expectations, dropped 0.08 percentage points to 3.71% after the speech was published.

The talk of rate cuts comes while President Donald TRUMP continues to publicly pressure the Fed to slash rates faster. He has repeatedly criticized Powell and the rest of the FOMC, calling for aggressive action to support the economy. On Friday, Powell did not directly answer Trump’s demands, but he defended the Fed’s independence.

“FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach,” he said.

Powell reviews inflation policy and reflects on past mistakes

Powell also pointed to ongoing uncertainty around tariffs and global trade talks. He said consumer prices are slowly increasing, but wholesale costs are rising more quickly. The WHITE House believes tariff-driven inflation will not last and supports rate cuts. Powell didn’t rule that out but made it clear that outcomes could vary.

“The tariff impacts will be short-lived, a one-time shift in the price level,” he said, calling that a “reasonable base case.” But he added that this is not guaranteed. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks,” he said. “Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”

In addition to commenting on current risks, Powell also talked about the Fed’s five-year review of its strategy. That review included changes to how the Fed handles inflation. In 2020, during the Covid crisis, the Fed had switched to a strategy that allowed inflation to go above its 2% target temporarily.

The idea was to help the job market recover more fully before tightening again. But soon after, inflation shot up, reaching four-decade highs. At the time, the Fed downplayed it, calling the spike “transitory.” That turned out to be a mistake.

“There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes,” Powell said. “The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.”

The Fed has now returned to its firm commitment to the 2% inflation target. Some critics say that the number is too high and weakens the dollar. Others argue it should be more flexible. But Powell defended the position.

“We believe that our commitment to this target is a key factor helping keep longer-term inflation expectations well anchored,” he said.

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