In August 2025, Federal Reserve Chair Jerome Powell signalled that the Fed may begin cutting rates later this year. This marked a shift from the “higher for longer” stance that has defined policy since 2022. Markets reacted immediately: stocks rallied, bond yields fell, and expectations for easier monetary conditions surged.
Why Interest Rates Matter
Interest rates set the price of money. When central banks raise or lower them, the impact flows across the financial system:
- Equities: Lower rates reduce financing costs and increase the present value of future earnings.
- Bonds: Bond prices move inversely to yields. If rates are expected to fall, existing bonds become more attractive.
- Currencies: Rate differentials between countries influence where global capital flows.
- Commodities: Priced in dollars, commodities such as oil and gold often rise when the dollar weakens and demand expectations improve.
How Markets React Across Asset Classes
Equities
After Powell’s Jackson Hole speech, equities surged. The Dow Jones rose more than 800 points — about 1.9% — closing at its first record high of 2025. The S&P 500 gained 1.5%, while the Nasdaq climbed 1.9%, with small-cap and financial stocks — both sensitive to borrowing costs — leading the way.
Bonds
Investors quickly priced in a September rate cut. Two-year Treasury yields dropped sharply, with futures implying an 80–83% probability of a 0.25% cut next month. Bond markets often react faster than equities, as they directly reflect expectations for interest rates.
Currencies
The dollar weakened against major peers, including the euro and yen. Lower expected U.S. rates reduce the relative return for holding dollar assets, encouraging flows into currencies where yields remain higher.
Commodities
Gold rose nearly 1% on the day of Powell’s remarks, supported by both the weaker dollar and expectations of looser monetary policy. Oil prices also edged higher, as investors bet that lower borrowing costs could help stimulate global demand.
More Than Just the Decision
It is not only the rate change itself that matters. Markets often move more on forward guidance — the language central banks use about future policy.
Powell did not announce a cut in August. But by highlighting signs of a cooling labour market and easing inflation risks, he gave investors confidence that policy was set to shift. That guidance was enough to reprice assets across the board.
The Political Backdrop
This shift comes against a more complicated political backdrop. President Trump’s efforts to remove Fed Governor Lisa Cook have raised concerns about the independence of the Federal Reserve. For markets, central bank credibility is critical. If investors believe decisions are being driven by politics rather than data, the effectiveness of policy — and market confidence in it — can weaken.
Risks to the Rally
Despite the enthusiasm that followed Powell’s remarks, several risks remain:
- Inflation is still above target, limiting how aggressively the Fed and other central banks can cut.
- Bond market pressures persist, as government debt issuance keeps long-term yields elevated even as short-term yields fall.
- Stagflation risks — a mix of higher prices and slowing growth — remain a possibility, which could cap equity gains.
Looking Ahead
The next few months will be defined by data. Inflation prints, employment reports, and central bank meeting minutes will all shape whether the Fed cuts rates in September. Markets will also watch Europe, where the ECB faces a similar balancing act between easing financial conditions and keeping inflation anchored.
Political developments will add another layer of uncertainty. The independence of central banks remains central to investor trust. Any sign of interference risks undermining credibility at a critical time.
Final Takeaway
Central bank decisions remain the anchor of global finance. But as Powell’s August speech showed, markets often respond as much to signals about the future as to the decisions themselves.
The optimism currently priced in reflects hopes that a cycle of rate cuts will begin in September. Whether that proves justified will depend on inflation, labour market data, and the Fed’s ability to act independently. For now, the message is clear: central banks still set the tone for markets, and even a hint of policy change can send ripples across the world economy.
IB Insights 
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