Fixed Income & Equities Markets Week in Review

Treasury yields moved sharply lower on Friday after Fed Chair Jerome Powell signaled that a September rate cut may be appropriate to support the labor market, fueling expectations that the Fed could ease policy sooner than previously thought. His remarks were interpreted as a meaningful shift in tone, reassuring markets that policymakers are prepared to act if labor conditions continue to weaken.

The rally was broad-based, with yields falling as much as 12 basis points across the curve. Two-year notes, which are especially sensitive to monetary policy expectations, declined to 3.67%, their lowest level in more than a week. Futures markets now assign an 85% probability to a 25-basis-point cut at next month’s FOMC meeting, up from about 65% before Powell spoke. Traders also increased the odds of further cuts by year-end, reflecting the growing view that the Fed is pivoting from a singular focus on inflation toward a more balanced consideration of economic risks.

In prepared remarks for the Kansas City Fed’s Jackson Hole symposium, Powell stated: “The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” By emphasizing “shifting risks,” Powell appeared to suggest that the Fed may not wait for inflation to fall back to target before cutting rates—a message that resonated strongly with bond investors.

The challenge for policymakers is navigating a delicate tradeoff: cutting rates too aggressively risks reigniting inflation pressures, particularly as recent data shows signs of renewed price momentum. But acting too slowly or too modestly risks a deeper deterioration in the labor market, which historically has been hard to reverse once unemployment begins to rise. This balance will likely dominate the Fed’s decision-making over the coming months.

Adding another layer of uncertainty, Treasury Secretary Scott Bessent announced this week that interviews for Powell’s potential successor will begin in September, with 11 candidates under consideration. The President’s eventual choice will be closely scrutinized, especially considering his recent criticism of the Fed for delaying rate cuts this year. Powell’s current term does not expire until May 2026, but with succession planning already underway, Fed policy and leadership are set to remain at the forefront of market attention for some time.

For the week, Treasury yields were lower by as many as 8 basis points.

Note: Municipal yields are as of the previous business day.

* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon