TREASURIES -US yields plummet as Fed's Powell opens door to September rate cut

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 22 (Reuters) - U.S. Treasury yields sank on Friday after Federal Reserve Chair Jerome Powell alluded to a possible interest rate cut at the central bank's policy meeting next month, but did not fully commit to the move.

The Fed's top official acknowledged on Friday the persistent risk of higher inflation along with the growing challenges to the jobs market.

"While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers," Powell told an audience of international economists and policymakers at the Fed's annual Jackson Hole conference in Wyoming.

"This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly," he said, before touching on inflation risks.

He added that the "shifting balance of risks may warrant adjusting our policy stance."

In afternoon trading, the U.S. two-year yield, which is tied to the Fed's monetary policy, was down 10.2 basis points (bps) to 3.69% US2YT=RR, on track for its largest daily fall since August 1. The yield earlier fell to more than a one-week low of 3.675%.

The benchmark 10-year yield also fell to a one-week low and was last down 7.2 bps to 4.259% US10YT=RR, its biggest one-day decline in three weeks.

"This was generally a dovish speech that is consistent with Nomura's view that a 25-basis-point cut in September is the base case," said David Seif, chief economist for developed markets at Nomura in New York.

"We continue to think that a hold is possible with a strong labor market report and/or hot inflation report next month, as is a 50-bp cut if the labor market report next month is once again soft."

The yield curve steepened after Powell's remarks, with the gap between two-year and 10-year yields hitting 58.1 bps US2US10=TWEB, the steepest level since mid-July. It was last at 56.8 bps, compared with 53.2 bps late on Thursday.

The steepening suggested that traders are pricing an imminent rate cut from the Fed.

After Powell's remarks, U.S. rate futures market were pricing in an 89% chance the Fed will cut rates in September, according to the CME Group's FedWatch, up from 75% on Thursday. Rate futures have also factored in about 58 bps of easing this year. At one point on Thursday, futures showed just 48 bp of rate declines for 2025.

Also on Friday, U.S. President Donald Trump said he would fire Fed Governor Lisa Cook if she doesn't resign.

Cook, the first Black woman to serve on the Fed's Board of Governors, said she had "no intention of being bullied to step down" after Trump on Wednesday called for her resignation on the basis of allegations about mortgages she holds in Michigan and Georgia.

"If Cook quits or gets fired, they're going to be able to add someone who will be in agreement with Trump's approval, and this just strengthens his stance going forward of having lower rates," said Michael Matousek, head trader at U.S. Global Investors in San Antonio.

"That would be very bullish for the markets and might not be the best thing for the economy."