US Federal Reserve Chair Jerome Powell addressed the Jackson Hole symposium, indicating a possible rate cut in September. Powell noted slowed labor demand and supply, despite inflation pressures from tariffs, which he described as temporary. He highlighted the risks to the labor market and the Fed’s commitment to data-driven decisions amidst external pressures. Powell’s comments elicited a market response, with a 90% chance of a September rate cut now priced in by futures.
Fed official Hammack took a contrasting stance, maintaining a focus on inflation control. She highlighted persistent inflation pressures and insisted that policy remain mostly restrictive. Despite showing openness to new data, Hammack stressed the need for significant unemployment weakening before easing policy, reflecting concerns over inflation persistence.
Market Performance
US stocks surged, with the NASDAQ rebounding above key moving averages and closing higher, though weekly performance was mixed. The NASDAQ fell 0.58%, while the Dow rose 1.53% and the S&P gained 0.27%. The small-cap Russell 2000 jumped 3.86% today, capping a 3.298% weekly rise. European markets also closed higher, with all major indices seeing gains and Southern Europe making record highs.
US yields trended lower, notably in the shorter term, as the market anticipated Fed cuts, resulting in a steep drop of the US dollar against major global currencies.
The Fed has opened the door for a rate cut in September, and we see markets aggressively pricing this in. We should position for continued upside in equities, especially in rate-sensitive and risk-on assets like the Nasdaq and Russell 2000 indices. Buying call options or establishing bullish spreads can capitalize on this strong momentum.
This dovish pivot builds on recent economic reports, such as the early August 2025 jobs data which showed a rise in the unemployment rate to 3.9% despite a solid headline number. This gives the Fed justification to shift its focus toward the employment side of its mandate. The path of least resistance in the next few weeks appears to be higher for stocks and lower for front-end bond yields.
Market Strategy
The bond market’s reaction, with the 2-year yield falling nearly 10 basis points, is a clear signal that traders are betting on lower policy rates. We can express this view by positioning in short-term interest rate futures or options that will profit from yields moving lower into the September meeting. We saw a similar dynamic in late 2023 when markets front-ran the Fed’s eventual pivot, leading to a powerful rally in fixed income.
However, with a 90% probability of a cut priced in, the market is vulnerable to any strong data that contradicts the narrative. The July 2025 CPI report showed core inflation was still persistent at 3.2%, a fact that more hawkish members like Hammack will not ignore. We think it’s wise to hedge long equity positions by purchasing cheap, out-of-the-money put options as protection against a hawkish surprise in the next inflation release.
The US dollar fell sharply against all major currencies, and we expect this weakness to persist as rate differentials narrow. We should favor shorting the dollar against currencies backed by relatively strong economies, such as the Euro, especially as European indices are hitting multi-year highs. The Australian dollar’s 1.07% rally also signals strength in commodity-linked currencies as global growth fears recede.
The impressive 3.86% one-day rally in the Russell 2000 suggests a significant shift back into risk assets. Small-cap companies are particularly sensitive to interest rates, so we should consider trades that benefit from their continued outperformance. Using options on the IWM ETF could provide leveraged exposure to this theme as the market anticipates an easier credit environment.
