Assessing the Sustainability of the Current Stock Rally Amid Powell's Pivotal Speech

Federal Reserve Chair Jerome Powell's August 2025 address at Jackson Hole has ignited a surge in global markets, with investors interpreting his remarks as a green light for a measured easing of monetary policy. The Dow Jones Industrial Average, S&P 500, and Nasdaq all posted double-digit gains in the immediate aftermath, while the 10-year Treasury yield plummeted to 4.26%—a stark reflection of shifting investor sentimentSpeech by Chair Powell on the economic outlook and …^[1]. Yet, as the market rally gains momentum, the critical question remains: Is this optimism sustainable, or is it a fleeting reaction to a single speech?

Powell's message was twofold. First, he acknowledged the Fed's progress toward its dual mandate: inflation, though still elevated, has declined significantly from post-pandemic peaks, and the labor market, while resilient, is showing signs of coolingSpeech by Chair Powell on the economic outlook and …^[1]. Second, he signaled openness to rate cuts, with a 25-basis-point reduction at the September meeting now priced in by markets. According to a report by Bloomberg, the probability of a September cut climbed from 73.5% to over 87% following the speechSpeech by Chair Powell on the economic outlook and …^[1]. This pivot, however, is not without caveats. Powell emphasized that the Fed remains “data-dependent,” with downside risks to employment—particularly from recent tariff hikes—posing a potential drag on consumer prices and wage growthSpeech by Chair Powell on the economic outlook and …^[1].

The market's exuberance is understandable. A rate cut, even a modest one, signals a shift from tightening to easing, which typically fuels risk-on behavior. As stated by the Federal Reserve in its official transcript, the central bank is now “100 basis points closer to neutral policy” compared to a year agoSpeech by Chair Powell on the economic outlook and …^[1]. This suggests that the Fed's aggressive tightening cycle has reached a plateau, and the door is open for further reductions if inflation continues to trend downward. However, the sustainability of the rally hinges on whether Powell's “neutral policy” is indeed neutral enough to stabilize growth without reigniting inflationary pressures.

A key wildcard is the impact of tariffs. Powell explicitly warned that higher tariffs could trigger a “one-time shift in the price level” as supply chains adjustSpeech by Chair Powell on the economic outlook and …^[1]. While this might be a temporary blip, prolonged inflationary effects—should wage growth accelerate in response—could force the Fed to backtrack on its dovish stance. This risk is compounded by the labor market's unusual equilibrium: employers and workers are still navigating a tight but not overheated environment, leaving room for sudden downturnsSpeech by Chair Powell on the economic outlook and …^[1].

For now, investors are betting on a soft landing. The S&P 500's 1.5% surge post-speechSpeech by Chair Powell on the economic outlook and …^[1] reflects confidence in Powell's ability to balance these competing forces. Yet, as with any central bank-driven rally, the devil lies in the details. If inflation stubbornly resists further declines or if employment data deteriorates more sharply than anticipated, the Fed's flexibility could evaporate.

In conclusion, the current stock rally appears to be a rational response to Powell's signals of policy accommodation. However, its longevity will depend on the Fed's ability to navigate the delicate interplay between inflation, tariffs, and labor market dynamics. For now, markets are pricing in a September cut and a gradual easing path—but the central bank's next moves will ultimately determine whether this optimism is justified or premature.