The labor market cooling gives the Fed permission to stop
In the long struggle between growth and stability, Wall Street found a moment of relief on Tuesday as fresh economic data hinted that the Federal Reserve's prolonged campaign against inflation may be nearing its end. Falling consumer confidence and the lowest job openings since early 2021 suggested the labor market was finally yielding to the pressure of higher borrowing costs — a signal markets had been waiting for across more than a year of rate increases. The S&P 500, Nasdaq, and Dow all rose, not in celebration of prosperity, but in the quieter hope that the medicine may soon be enough.
- Markets surged sharply on Tuesday as two unexpected data points — cratering consumer confidence and job openings at a two-year low — raised real hopes that the Fed's rate-hiking cycle is approaching its end.
- The bond market moved swiftly: the two-year Treasury yield dropped from 5.03% to 4.91%, and the ten-year fell to 4.12%, easing pressure on mortgages and loans that had been tightening across the economy.
- Declining resignations alongside falling job openings point to a labor market losing its fever — exactly the wage-pressure relief the Fed has been engineering for over a year at the cost of higher borrowing across the board.
- Despite the rally, caution lingers: three critical reports — GDP, the Fed's preferred inflation gauge, and August jobs numbers — are due before the week is out, and each could rewrite the narrative before September's policy meeting.
Wall Street surged on Tuesday after a pair of economic reports suggested the Federal Reserve might finally be ready to pause its aggressive interest rate campaign. The S&P 500 rose 1.4%, the Nasdaq climbed 1.7%, and the Dow gained 0.8% — the third consecutive week of gains for the benchmark index.
The catalyst was a dual signal of economic cooling. Consumer confidence fell more than expected in August, reversing July's strong reading, while government data showed job openings had dropped to their lowest point since March 2021 — a steeper decline than forecasters had anticipated. The number of Americans voluntarily quitting their jobs also fell for a second straight month, suggesting that the labor market, long a source of inflationary wage pressure, was finally softening.
For the Fed, which had been raising rates since early 2022 to combat persistent inflation — pushing borrowing costs to their highest levels since 2001 — the data offered something close to vindication. Fixed-income strategist Sam Millette noted that both bonds and stocks rallied simultaneously as the probability of a September rate hike collapsed. Treasury yields fell sharply across the board, with the closely watched ten-year note dropping to 4.12% from 4.21% — a meaningful shift for borrowers across the economy.
Still, advisors like Jason Betz of Ameriprise Financial urged measured optimism. The Fed had made clear it would remain data-dependent, and the week ahead would put that conviction to the test. An updated GDP reading, the Fed's preferred inflation measure — the personal consumption expenditures index, already down to 3% from 7% a year prior — and August's employment report were all due before the Fed's September meeting. Markets were betting heavily on a pause. The deeper question was whether the data would confirm what Tuesday had suggested: that the long effort to cool inflation without breaking the economy might finally be working.
Wall Street opened Tuesday with a sharp rally, driven by two pieces of economic news that suggested the Federal Reserve might finally stop raising interest rates. The S&P 500 climbed 1.4%, the Nasdaq jumped 1.7%, and the Dow Jones Industrial Average gained 0.8%—marking the third consecutive week of gains and positioning the benchmark index toward its strongest month in weeks.
The catalyst was a pair of reports that painted a picture of an economy losing steam. The Conference Board, a business research organization, released data showing consumer confidence had fallen in August, catching economists off guard after July's robust reading. Simultaneously, the government announced that job openings had dropped to their lowest level since March 2021, a steeper decline than forecasters had anticipated. The same employment report revealed that the number of Americans quitting their jobs had plummeted for a second straight month—clear signals that the labor market, which had been a bulwark against recession, was finally cooling.
For the Federal Reserve, these numbers represented something close to vindication. For more than a year, the central bank had been raising its benchmark interest rate to combat persistent inflation, pushing borrowing costs to their highest levels since 2001. The stronger the labor market remained, the harder it became to bring inflation under control, because employers kept raising wages to attract and retain workers. Now, with job openings falling and resignations declining, that wage pressure appeared to be easing. Sam Millette, a fixed-income strategist at Commonwealth Financial Network, noted that both bonds and stocks surged on the news, while the probability of a rate increase at the Fed's September meeting collapsed.
The immediate market reaction rippled through the bond market. The yield on the two-year Treasury note, which tracks Federal Reserve expectations closely, fell from 5.03% to 4.91%. The ten-year Treasury yield dropped to 4.12% from 4.21% the previous day—a meaningful shift for borrowers, since that rate influences mortgage and loan pricing across the economy. Just a week earlier, the ten-year yield had climbed near its highest level since 2007, a move that had spooked equity investors and contributed to a 2.2% decline in the S&P 500 during August, even as the index had surged nearly 20% through July.
Jason Betz, a private wealth advisor at Ameriprise Financial, captured the cautious optimism in the room: the Fed appeared to be nearing the end of its rate-hiking cycle, but more evidence would be needed before markets could be certain. The week ahead would test that conviction. On Wednesday, the government would release an updated reading on gross domestic product. Thursday would bring the Fed's preferred inflation measure, the personal consumption expenditures index, which had been cooling for months—down to 3% in June from 7% a year earlier. Friday would deliver August's employment report, the final major data point before the Fed's September decision.
The Fed itself had signaled it would remain data-dependent, willing to raise rates further if inflation demanded it, but equally willing to pause if the economy showed sufficient cooling. Wall Street was now betting heavily on the pause. The question hanging over markets was whether the next three days of economic reports would confirm what Tuesday's data had suggested: that the long campaign to tame inflation without triggering a recession might finally be working.
Notable Quotes
The markets reacted positively to the consumer confidence and job openings reports, with both bonds and stocks rising as the probability of a Fed rate increase in September fell sharply.— Sam Millette, fixed-income strategist at Commonwealth Financial Network
My instinct tells me the Fed is close to finishing with rate increases, but we need to see more evidence from the numbers we saw today.— Jason Betz, private wealth advisor at Ameriprise Financial
The Hearth Conversation Another angle on the story
Why did the stock market jump so much on news that the economy is slowing down? Shouldn't that be bad for investors?
It would be, normally. But the market was terrified the Fed would keep raising rates indefinitely. A slowing economy gives the Fed permission to stop. That's worth more to stock prices right now than a booming economy would be.
So the labor market cooling is actually good news?
For stocks and bond holders, yes. For workers, it's more complicated. Fewer job openings and fewer people quitting means less leverage to negotiate for higher wages. The Fed sees that as progress on inflation. The market sees it as a reason to buy.
What happens if the inflation data this week comes in hot?
Then the whole narrative flips. The Fed would have to keep tightening, rates would stay high, and stocks would probably sell off again. Everything hinges on Thursday's inflation report and Friday's jobs number.
The two-year Treasury yield dropped pretty sharply. What does that tell us?
It tells you that traders are pricing in a pause—maybe even rate cuts down the road. The two-year is the most sensitive to Fed expectations. When it falls that fast, it means the market has shifted its entire forecast for monetary policy.
Is there any chance the Fed raises rates again in September?
There's always a chance, but it's small now. The market is assigning maybe 15-20% odds to a hike. The Fed would need to see inflation accelerate or the labor market strengthen unexpectedly. Right now, the trend is in the other direction.