U.S. stocks surged on Thursday after a Federal Reserve governor signaled support for keeping interest rates flat, easing market anxiety over tightening monetary policy and lowering Treasury yields. The rally followed weeks of heavy selling driven by soaring oil prices and escalating tensions in the Middle East.
Financial markets experienced a dramatic reversal as investors weighed shifting economic signals from central bank policymakers against mounting geopolitical pressures. Stock indices climbed broadly, providing relief to investors who had spent recent weeks dumping government bonds and bracing for a more aggressive monetary tightening path at the central bank’s upcoming meeting.
Federal Reserve Policy Debates and Waller’s Signal
Market participants spent the week anticipating the Federal Reserve meeting scheduled for Sept. 16, with markets largely pricing in an interest rate hike as Treasury yields and oil prices weighed on equities. That outlook shifted abruptly on Thursday when Fed Governor Christopher Waller indicated he wants to keep interest rates steady.
Waller’s comments contrasted sharply with the hawkish tone struck by Fed Chair Kevin Warsh during the central bank’s annual Jackson Hole conference last week. Explaining his stance, Waller pointed to muted domestic effects from President Trump’s tariffs and noted that higher energy prices amid Iran-related news have not bled into much of the economy. Although he acknowledged that inflation remains meaningfully above the Fed’s 2% goal, Waller said recent trends suggest we are finally seeing some signs of disinflation.
If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,
Waller told Reuters in an interview.
Fed Governor Christopher Waller, via REUTERS
I’m going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting. What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%. Waller
Market Relief and the Retreat in Treasury Yields
The policy signals triggered an immediate rally across major U.S. indexes. The Dow Jones Industrial soared 624 points, or 1.2% — its best day in a month — while the S&P 500 and Nasdaq also rose more than 1%.
The bond market found similar relief. The U.S. 10-year Treasury yield, which had hit its highest level in three years the day prior, dropped to 4.756%. Investors had dumped government bonds over the past few weeks, convinced the Fed might hike interest rates at its Sept. 16 meeting. The rapid run-up in Treasury yields was threatening to drive borrowing costs higher for Americans already struggling to afford homes and new cars.
Energy Markets, Regional Conflict, and Gasoline Pressures
Energy markets remained volatile as geopolitical conflict rippled through the Middle East. Brent crude oil futures remained stubbornly above $95 a barrel Thursday — though they dropped from a brief high of $97 earlier in the day, which was reached after Iran fired missiles at Kuwait, a US ally in the Persian Gulf region.
At home, consumers continued feeling the pinch at service stations. National average gasoline prices jumped to $4.14 a gallon, according to AAA. Prices at the pump have remained stuck above the $4 mark for weeks, a notable increase from the pre-war average of $2.98. It’s another added cost piled on top of inflation-battered Americans, who are also facing sky-high prices on new and used vehicles and rising car insurance costs.
Global Reserves and Supply Shifts
But analysts at Goldman Sachs said in a note last week that oil exports from the Persian Gulf area have rebounded to roughly two-thirds of pre-war levels. It’s unclear how increased tensions in the Middle East this week have hit those exports.
Meanwhile, global oil reserves have been shrinking, with the US Strategic Petroleum Reserve falling below the 300 million-barrel mark – its lowest level in more than four decades. Trump has announced a historic agreement with Venezuela that will allow the US to more than double
its reserves, taking a majority stake in more than 65 billion barrels of Venezuelan oil. The president said the deal is meant to lower gasoline prices for Americans. Experts have warned the move is unlikely to bring down prices at the pump immediately, since there’s no telling how long it could take to gain access to the additional reserves.
