Federal Reserve Chairman Powell successfully walked a middle path on Wednesday. Investors reacted by pushing up U.S. stocks and bonds.
Powell maintained his usual cautious stance, rebuffing calls for an unexpected rate cut by the Fed on Thursday, while reiterating the Fed's close monitoring of the cooling labor market.
He managed to hint at a high likelihood of a rate cut in September, but did not indicate that the labor market and economy had slowed to a concerning level for investors.
Powell stated that the Fed's next steps will depend on overall economic data. He also added that while a more aggressive rate cut remains a possibility, the Fed's rate-setting committee has not discussed a 50 basis point cut in September.
As Powell spoke, U.S. stocks rose across the board. Small-cap stocks showed a particularly strong reaction to Powell's comments about a potential rate cut in September, with the Russell 2000 index surging during Powell's press conference, after lagging earlier in the day. Despite quickly giving back most of the gains, the Russell 2000 index still closed up 0.5% on Wednesday, according to FactSet data, and has risen over 10% in July.
The Nasdaq and S&amp;P 500 indices recorded their strongest daily gains since February. This is especially significant for the Nasdaq, marking the end of a volatile month on a positive note, despite the index falling 0.8% in July. Meanwhile, the S&amp;P 500 index closed higher for the third consecutive month.
Bond prices also rose significantly. According to Dow Jones market data, as of 3 p.m. Eastern Time, the yield on the 10-year U.S. Treasury bond fell by 3.6 basis points to 4.107%. Bond prices move inversely to yields.
From the market reaction, Powell cleared the way for the broad rebound seen in July to continue.
Bret Kenwell, a U.S. investment analyst at eToro, said, &#34;I would say his comments were positive for the rate-cut camp, making rate-sensitive stocks a focus as they could continue to perform well.&#34;
But others warn that if monetary policy adjustments fail to prevent a more severe economic slowdown, Powell may disappoint investors.
Charlie Ripley, portfolio manager at Allianz Investment Management, said in an interview, &#34;Lower rates certainly benefit small-cap companies, but the overall economic performance must also be considered.&#34; &#34;In an environment of economic slowdown, small-cap stocks may ultimately be more sensitive.&#34;
James St. Aubin, Chief Investment Officer at Osen Park Asset Management, said in an email comment that the lack of dissent within the Fed's rate-setting committee represents another underestimated risk. He said, &#34; The question we should be asking is: where are the doves on the committee?&#34;

Jerome Powell released a dovish signal on Wednesday, boosting US stocks and Treasuries. He stated that the Fed's next move will depend on overall economic data. The market responded positively to his comments, but some warned that Powell may disappoint investors

Powell sends a dovish signal, but the risks are still underestimated!