Why Powell’s Jackson Hole speech fuels Fed’s September rate cut market expectation?

As global efforts to combat inflation draw closer to their conclusion, the financial world is intently focused on Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium.

Scheduled for Friday, Powell’s Jackson hole speech is expected to shed light on the Fed’s future monetary policy, particularly regarding interest rate cuts that could begin as early as September.

What makes Jackson Hole so special?

• ‘Fly fishing‘: The Kansas City Fed chose Jackson Hole in the early 1980s to entice Fed Chairman Paul Volcker with its excellent late-August fly fishing. Over the years, the symposium has become the premier event on the Fed’s calendar, attracting influential policymakers and thinkers because of its prestigious network, stunning location, and well-curated topics and guest lists.
• Annual event hosted by Fed: The Jackson Hole Economic Policy Symposium, a prestigious annual event hosted by the Federal Reserve Bank of Kansas City in the stunning Grand Teton National Park, has become a must-attend gathering for central bankers, top economists, and influential policymakers from around the globe.

• Informal setting: The event, known for its informal and rustic setting, has become a premier gathering for economic leaders, offering a unique mix of deep economic discussions and Western-themed activities. Attendees, often seen in cowboy boots and hats, enjoy not only deep economic discussions but also the spectacular scenery and activities like afternoon hikes and Western-themed dinners.

• September cut: This year’s theme, “Reassessing the Effectiveness and Transmission of Monetary Policy,” promises to spark critical discussions, with Fed Chair Jerome Powell’s speech on the “Economic Outlook” set to be the centerpiece. Traders and analysts will be hanging on his every word, searching for clues about the Fed’s next moves, particularly regarding potential rate cuts.

Powell’s Jackson Hole speech: Is rate cut coming?

The Fed faces the challenge of managing inflation while avoiding further weakening of the labor market. Investors and economists will be scrutinizing every word for clues about the future path of U.S. monetary policy, with significant implications for both the domestic and global economies.

• History repeats itself: Jackson Hole has historically been a platform for significant policy signals. In previous years, Powell used this forum to outline major shifts in Fed policy, such as the introduction of “flexible average inflation targeting” in 2020, and to provide clues about the future of policy. This year, investors are particularly sensitive to Powell’s tone, given the current economic uncertainties.

• Investor focus: With the possibility of a 100 basis point reduction in interest rates by the end of the year, investors are eagerly awaiting Powell’s guidance. The speech is seen as a critical moment for markets, which have already priced in a series of cuts, though the exact pace and magnitude remain subjects of speculation.
• Powell’s speech: Powell is expected to reaffirm the Fed’s commitment to a data-driven approach, emphasizing that any decision on rate cuts will depend on forthcoming economic data, particularly labor market figures. His speech is likely to be cautious, avoiding any firm commitments on the timing or scale of rate cuts.

Does Fed officials support interest rate cut in September?

• Philadelphia Fed President Patrick Harker: Harker has indicated that he supports a rate cut in September, provided that economic data continues to align with expectations. He emphasized the importance of a stable and methodical approach, suggesting that the focus should be on a consistent easing process rather than the size of individual cuts.
• Boston Fed President Susan Collins: Collins echoed Harker’s sentiment, advocating for a cautious approach. She noted that while inflation is moderating; the Fed needs more confidence that it will return to the 2% target before aggressively cutting rates. Collins supports a gradual rate reduction if the data supports it.
• Kansas City Fed President Jeffrey Schmid: Schmid highlighted the importance of bringing inflation sustainably down to 2%. He expressed concern that the labor market might need further cooling and indicated that the Fed’s job is not yet done.
• Minneapolis Fed President Neel Kashkari: Kashkari, speaking earlier in the week, noted that he does not foresee a need for rate cuts exceeding 25 basis points at any of the remaining meetings this year, citing the relative stability of layoffs and unemployment claims.

Zoom in: Minutes from the Federal Open Market Committee (FOMC) meeting held on July 30-31 reveal that most members believe it would be appropriate to ease monetary policy if upcoming data aligns with expectations.

What US market looks like ahead of Powell’s speech?

• Current market conditions: On Thursday, U.S. stocks saw declines as investors adopted a cautious stance ahead of Powell’s speech. The Dow Jones, S&P 500, and Nasdaq all posted losses, reflecting uncertainty about the Fed’s next moves.
• Treasury yields: The yield on the 10-year U.S. Treasury note held steady at 3.85%, while the U.S. dollar index balanced around 101.3, indicating a market in wait-and-see mode.
• Gold and oil: Gold prices edged up slightly, with an ounce trading at $2,492, while Brent crude oil remained steady at $76.6 per barrel.
• Fed’s current stance: The Federal Reserve has kept its benchmark interest rate at a 23-year high for the past 13 months following an aggressive rate hike cycle aimed at curbing inflation. However, the recent labor market softening and slowing economic activity have shifted expectations toward easing.
• Economic indicators: Recent data has painted a mixed picture. The U.S. unemployment rate unexpectedly rose to 4.3% in July, the highest since October 2021, while job creation slowed significantly. Meanwhile, inflation continues to moderate but remains just above the Fed’s 2% target, leaving policymakers with a delicate balancing act.

How Powell’s speech echoed in global market?

• European markets: European markets were mixed, with Germany’s manufacturing PMI for August falling short of expectations at 42.1, while the services sector PMI came in slightly above forecasts at 51.4. The broader Eurozone saw its manufacturing PMI miss expectations, but its services PMI exceeded them. The FTSE 100 in the UK edged up by 0.06%, while Germany’s DAX rose by 0.24%. France’s CAC 40 and Italy’s FTSE MIB remained flat.
• Asian markets: In Asia, markets displayed cautious behavior ahead of Powell’s speech, with narrow trading ranges observed across the region. Japan’s Consumer Price Index (CPI) for July rose by 2.8%, above expectations, potentially easing pressure on the Bank of Japan to raise rates. By the close, Japan’s Nikkei 225 was up by 0.5%, while Hong Kong’s Hang Seng, South Korea’s Kospi and China’s Shanghai Composite posted minor losses.