Treasury Yields Jump as Powell Says Adjusting Rates May Be Warranted Because of Risks

U.S. Treasuries climbed on Friday after Federal Reserve Chair Jerome Powell opened the door to a potential interest-rate cut next month. His comments, delivered during the Fed’s closely watched Jackson Hole symposium, highlighted growing risks in the labor market, even as inflation remains a lingering concern.

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Bond yields dropped sharply across maturities. The two-year note, which is highly sensitive to Fed policy expectations, fell as much as seven basis points, while the benchmark 10-year yield slipped to 4.27%. The move underscored investor confidence that the central bank could ease policy in the near term.

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In his prepared remarks, Powell emphasized that the Fed has room to proceed carefully. “The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” he said. This language suggests the central bank is prioritizing flexibility as it weighs its next move.

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While Powell acknowledged that inflation remains above the Fed’s 2% target, his comments marked a shift toward addressing labor market vulnerabilities. For months, the Fed’s main focus has been bringing down price pressures without triggering a recession. However, recent economic data, including softer job growth and slowing wage gains, appears to be tilting the conversation toward employment stability.

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Investors wasted no time adjusting their expectations following Powell’s speech. Interest-rate swaps now indicate an 85% probability of a quarter-point rate cut in September, up from roughly 65% before Powell took the stage. This significant repricing reflects market confidence that the Fed is ready to pivot sooner rather than later.

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The bond market reaction was swift. Shorter-term Treasuries, which are most responsive to monetary policy shifts, led the rally. Longer maturities also gained, although the decline in 10-year yields suggests markets believe the easing cycle may not be as aggressive as previous ones.

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Many analysts viewed Powell’s tone as more dovish than in prior statements. “Powell’s speech suggests the Fed is increasingly shifting its focus from stubborn inflation to signs of labor market weakness,” said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole. “His comments seem to lay the groundwork for a September rate cut.”

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This interpretation aligns with recent comments from other Fed officials, who have hinted at a more balanced approach between fighting inflation and preserving employment. With inflation easing gradually and job market cracks starting to appear, the case for a precautionary cut is gaining momentum.

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The challenge for the Fed is managing the delicate trade-off between keeping inflation in check and avoiding a sharp slowdown in the economy. While consumer prices have cooled compared to last year’s highs, core inflation remains sticky. At the same time, payroll growth has moderated, and job openings have declined, raising concerns that aggressive monetary tightening could lead to an economic downturn.

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Powell acknowledged these crosscurrents in his Jackson Hole address, emphasizing the importance of data dependence and gradualism. “We are not on a preset course,” he reiterated, leaving the door open for adjustments depending on how economic conditions evolve.

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For investors, Powell’s remarks signal a potential turning point in monetary policy. If the Fed does deliver a rate cut in September, it would mark the first move toward easing since the central bank embarked on its aggressive hiking campaign to combat inflation.

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Lower rates could provide relief for rate-sensitive sectors such as housing and technology, which have faced headwinds from higher borrowing costs. However, uncertainty remains over the pace and magnitude of future cuts, which will likely hinge on incoming economic data.

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The Fed’s messaging from Jackson Hole reinforces the idea that policymakers are preparing to adjust course if labor market weakness deepens. For now, markets are betting on a September cut, and Treasuries are responding accordingly. Investors should stay alert to economic releases in the coming weeks, as they will shape the central bank’s next move and the broader market outlook.

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