Powell's Jackson Hole Speech Triggers Wall Street Rally

Fed Rate Cut Expectations - The market initially priced in a 65% probability of a rate cut, which increased to nearly 90%, but not fully priced in for September, suggesting lingering concerns about inflation or employment data [1] - The market had priced in over one rate cut two weeks prior, but the probability decreased to 70%, reducing the need for the Fed to counter the market [3] - Bank of America initially anticipated no rate cuts this year, a view largely out of consensus, primarily due to strong inflation data [5] Fed's Stance and Rationale - The Fed believes it is starting from a restrictive stance, viewing rate cuts as recalibration rather than stimulus [2] - The Fed is under political pressure, and a dovish tone could invite criticism, influencing the decision to lower the temperature [4] - The Fed is closely monitoring the labor market, balancing supply and demand, and awaiting further jobs data to determine future actions [7][8] Data Dependence and Future Outlook - The Fed will remain data-dependent, potentially looking past inflationary risks if they perceive it as a one-time adjustment rather than a long-term trend [8] - A more rapid rise in the unemployment rate could lead to more aggressive rate cuts, with expectations of a modest rise leading to two cuts this year as part of recalibration, avoiding recession [9] - While nominal rates are declining, inflation compensation is rising, suggesting the market may show signs of inflation targets moving higher and becoming unanchored from the Fed's 2% target [11][12]