Powell says unemployment, not inflation, is Fed's biggest concern

The Fed chairman noted a “significant” slowdown in the labor market, with the unemployment rate rising to 4.3% – almost a full percentage point above its level in early 2023. Powell stressed, “We do not seek or welcome a further slowdown in labor market conditions,” indicating a strong commitment to maintaining employment levels.

Impact on the market

Powell's comments have significantly increased expectations for rate cuts. Traders are now pricing in a one in three chance of a half-percentage point rate cut at the September meeting, with at least one such cut expected before the end of the year.

The impact was immediate: Following Powell's speech, US stock prices rose and US Treasury yields fell. The S&P 500 gained about 1%, approaching a record high, while the dollar weakened against a basket of currencies.

Fed's new focus: protecting jobs

The Fed's shift from fighting inflation to protecting the labor market is clear. Powell emphasized: “We will do everything in our power to support a strong labor market while we continue to make progress toward price stability.” This change of course opens a new chapter for the central bank and could influence its policy decisions in the coming months.

Market forecast

Given Powell's dovish tone and the Fed's clear prioritization of the labor market, we expect a bullish outlook for equities in the near term. The potential for aggressive rate cuts could fuel further market gains, especially in interest rate-sensitive sectors.

In fixed income, expectations of rate cuts are likely to push bond prices higher and lower yields. Forex traders should be prepared for possible dollar weakness as the interest rate differential with other major currencies narrows.