Powell Opens Door to Interest Rate Cut | Real Yield 8/22/2025

Federal Reserve Policy & Market Reaction - Fed Chair Powell's remarks opened the door to potential rate cuts as early as next month, leading to a surge in stocks and bonds [1][4] - The market initially priced in a 65% chance of a rate cut, which increased to nearly 90% following Powell's dovish tone [11] - A 12 basis point drop in the two-year yield was observed, indicating a more dovish stance than anticipated [13] - The market has largely priced in the expected rate cuts for the current year, particularly in the two-year note [19][20] - The September meeting is not a "done deal," with a range of possibilities still on the table and dependent on upcoming data [10][11] Economic Indicators & Outlook - The Fed is closely monitoring the labor market, with potential for more aggressive rate cuts if the unemployment rate rises quickly; expectations are around two cuts this year as part of a recalibration [4][16] - GDP growth is slowing to 12%, which is characterized as healthy, but there is fragility due to tariff volatility impacting business investment and lower-end consumers [25][26][27] - The base case anticipates a gradual slowing of GDP growth, but earnings have held up well, with second-quarter earnings showing 5% to 10% EBITA growth on the margins [38] - The long end of the yield curve is influenced by factors like the deficit, which are likely to prevent rates from aggressively declining [49] Credit Market & Investment Strategies - Howard Marks suggests putting more defense into portfolios and investing in credit as opposed to equities [30] - The market is seeing elevated yields that keep supply relatively lower and demand for yield buyers will continue to be there [39] - There is a potential for mispricing in individual securities, but overall, credit is seen as more attractive than equities, given the contractual return [40][41] - European markets are currently considered cheaper than the US, creating a good buying opportunity [50][51]