Fed Chair Powell gives clearest signal yet on path of interest rates

Updated at 10:46 AM EDT

Federal Reserve Chairman Jerome Powell dropped his strongest hint to date that the central bank is prepared to lower its benchmark lending rate amid what he described as confidence in the path of inflation and concern over recent cooling in the job market.

Speaking as part of the Fed's annual central banking retreat in Jackson Hole, Powell said "the time has come for policy to adjust," but noted that the labor market has "cooled considerably from its formerly overheated state" and that the balance of its two-sided mandate has changed.

"Overall, the economy continues to grow at a solid pace. But the inflation and labor market data show an evolving situation," Powell said. "The upside risks to inflation have diminished. And the downside risks to employment have increased."

"With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market," he added. "The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions."

U.S. stocks were firmly higher following the release of Powell's remarks and his address to the Jackson Hole event, with the S&P 500 rising 53 points on the session and the Nasdaq surging 245 points, or 1.4%. The Dow was last up 335 points on the session.

Benchmark 10-year Treasury bond yields fell 5 basis points to 3.811% while  rate-sensitive 2-year notes were trading at 7 basis points lower at 3.934%

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, fell 0.63% to a fresh 2024 low of 100.883.

More Economic Analysis:

• Kamala Harris sees markets stars align against Donald Trump
• CPI report upsets betting on big Fed rate cut
• Main Street businesses push back on Wall Street recession gloom

The CME Group's FedWatch, however, showed little change in betting on a larger 50 basis point rate cut. Those odds improved only modestly to around 32.5%.

"The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," Powell said.

Glen Smith, chief investment officer at GDS Wealth Management in Flower Mound, Texas, said Powell has effectively sealed the case for a September cut, but thinks markets might be overstating the case for further reductions into the end of the year.

Related: Fed Chair Powell's Jackson Hole speech might disappoint markets

"The more important question is whether this will be a one and done rate cut, or if it will be the beginning of a more substantial cutting cycle, and that will be determined by the economic data over the next two to three months," he said.

"The market is pricing in multiple rate cuts over the next 12 months, although we remind investors that the market has a history of being too optimistic about rate cuts," Smith added.

Related: Veteran fund manager sees world of pain coming for stocks