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Fed Chair's Rate Cut Hint Fuels Rally in Rate-Sensitive Stocks
22 Aug
Summary
- Fed Chair Powell hints at possible rate cut in September
- Homebuilders, banks, and small-caps see significant gains
- Expectations of Fed resuming rate-cutting cycle drive market optimism
On August 22, 2025, Federal Reserve Chair Jerome Powell's remarks about a possible interest rate cut in September have fueled a rally in rate-sensitive stocks. Traders now see a 90% chance of a rate cut next month, up from around 75% before Powell's comments.
The housing market, which is heavily dependent on mortgage rates, has seen a resurgence in investor interest. An index tracking homebuilders jumped nearly 4% on Friday, marking its biggest one-month gain since July 2024. However, analysts warn that multiple rate cuts are still needed to fully revive the sector.
Banks have also benefited from the shifting rate expectations, with the S&P 500 banks index adding 2% and the KBW regional banking index advancing 4.1%. Small-cap companies, which rely on external borrowing, have also seen their shares jump 3.8% to the highest level this year.
Utility stocks, often seen as bond proxies, have also gained as government bond yields fell on the growing expectations of Fed rate cuts. The S&P 500 utilities sub-index has advanced more than 15% since the last rate cut in December, hitting a record high this month.
Retailers and consumer discretionary stocks have also seen a boost, as lower borrowing costs typically increase consumer spending, which makes up about 70% of the U.S. economy. The S&P 500 consumer discretionary index rose 1.1%, with shares of retailers like Nike, Home Depot, and Best Buy climbing between 3.1% and 4%.
