Dow Jumps 635 Points as Fed Governor Waller Signals He'd Back Holding Rates Steady

Since Fed Chair Kevin Warsh's Aug. 30 Jackson Hole speech talked tough on inflation and pushed rate-hike odds back above 50%, gold and silver posted their sharpest one-day drop in six weeks, the yen breached ¥160 again, and global bond yields spiked Tuesday, Sept. 1, as U.S. forces struck Islamic Revolutionary Guard Corps targets in Iran, according to CNN. By Thursday, Sept. 3, the picture flipped. Fed Governor Christopher Waller told markets he's leaning toward supporting a rate hold at the Fed's Sept. 15-16 meeting, and stocks and bonds rallied hard.

Waller's Conditional Green Light

The Dow Jones Industrial Average climbed 635 points, or 1.2%, its best day in a month, according to PrimeXBT. The S&P 500 rose 1% and the Nasdaq Composite gained 1.3%.

Waller told markets, per CNBC, "we are finally seeing some signs of disinflation," while conceding inflation remains "meaningfully above" the Fed's 2% target. July's headline inflation ran near 3.7%, with core inflation around 3.3%, according to 24/7 Wall St.

His exact words matter. "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 said, according to 24/7 Wall St. He added, borrowing from John Lennon: "Give disinflation a chance. We can wait one meeting."

Waller has said he views current policy as only slightly restrictive and wouldn't hesitate to support tightening again if the August inflation data due over the next two weeks comes in hot. Markets traded on the hope, not the certainty.

The reaction showed up in fed funds futures, though the exact size of the move depends on whose data you check. CNBC reported odds of a September hike fell to 50.4%, down from 63.2% the day before. Separately, CME Group's FedWatch tool, cited by 24/7 Wall St, showed hike odds dropping roughly 12 percentage points to about 54.6%. Different tracking, same direction: traders pulled back hard on bets the Fed hikes this month.

Yields Reverse After a Middle East-Driven Spike

The 10-year Treasury yield touched its highest level since November 2023 on Wednesday, Sept. 2, before pulling back to around 4.75% Thursday, according to PrimeXBT. That spike didn't come out of nowhere.

CNN reported that global bond yields jumped Tuesday, Sept. 1, after the U.S. and Iran traded attacks for the first time in over a month, sending oil prices higher. Brent crude rose 4.6% to settle at $94.65 a barrel, its highest close in over a month. WTI rose 5.2% to $90.22, its first settle above $90 since July. Japan's 10-year yield hit 3% for the first time since 1996; the UK's 30-year yield hit its highest since 1998; Germany's 10-year hit its highest since 2011.

"The longer the conflict abroad persists, the greater the risk [of] long-run inflation," Tom Tzitzouris, head of fixed income research at Baird Strategas, told CNN. Oil-driven inflation doesn't care what the Fed governor hopes the data shows.

The yen, which breached ¥160 against the dollar on Warsh's hawkish tone last week, rallied 2% Thursday to trade at 155.47, per PrimeXBT, unwinding some of that move.

Treasury's Buyback Bet and the Fed-Treasury Non-Feud

Separate from Fed policy, the Treasury Department announced Aug. 19 it will double its long-end debt buybacks to $4 billion starting Sept. 9, focused on 10-to-20-year and 20-to-30-year bonds, aimed at supporting liquidity as the 30-year yield topped 5.31% on Aug. 17, its highest since June 2007, according to the Epoch Times.

Lawrence Gillum, chief fixed income strategist at LPL Financial, called the move "more of a band-aid than a panacea," telling the Epoch Times the buyback's size "isn't meaningful enough to make a big difference in yields" and that much of the rally that followed was "likely a result of offside positioning."

Breitbart pushed back on a Wall Street Journal framing that cast Treasury Secretary Scott Bessent and Warsh as adversaries over the bond market, arguing debt buybacks are Treasury's fiscal-management lane while rate policy is the Fed's monetary lane, and the two aren't actually at odds. No source in this reporting shows Warsh and Bessent contradicting each other publicly; the tension described by financial press outlets is about overlapping effects on yields, not a documented personal or policy conflict between the two men.

The Earnings That Moved Individual Stocks

Snowflake shares surged more than 19% after beating second-quarter earnings and revenue estimates with strong guidance, according to PrimeXBT. Broadcom fell 4% despite beating estimates, dragged down by a disappointing fiscal fourth-quarter revenue forecast. Ciena plunged nearly 11% even after fiscal third-quarter earnings jumped 215% to $2.11 per share and sales grew 37% to $1.7 billion, both above Wall Street targets, because management's softer margin outlook spooked investors.

Waller himself flagged the question ahead of the Sept. 15-16 FOMC meeting: whether the inflation data due over the next two weeks actually confirms the disinflation trend he's betting on. If it doesn't, Thursday's 635-point rally becomes the setup for a much rougher September.