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Goldman Sachs Expects Dovish Turn in Powell's Jackson Hole Speech

AInvestFriday, Aug 23, 2024 6:18 am ET
2min read

At 10 o'clock, Federal Reserve Chairman Jerome Powell will deliver a keynote speech at the Jackson Hole Annual Symposium.

Goldman Sachs has indicated that, despite investors being confident about the Federal Reserve cutting interest rates for the rest of this year, Powell may still surprise investors. In the view of Goldman Sachs, compared to the shock Powell brought to the market two years ago, this time Powell is more likely to bring a pleasant surprise.

Will Powell Bring a Pleasant Surprise?

Since becoming the Federal Reserve Chairman in 2018, Powell's speeches at Jackson Hole have always been closely watched by the market. Among them, the speech in 2022 was the most memorable for the market.

At that time, U.S. inflation was at its highest level in nearly 40 years, and Powell delivered a brief and direct 8-minute speech, which gave the market a big "shock": Powell reinforced the path of the Federal Reserve's strong interest rate hikes to fight inflation, and said that he would not waver in his determination to raise interest rates due to market fluctuations. After this strong hawkish speech, U.S. bond yields soared, and the S&P 500 index fell nearly 8% within a week.

However, Goldman Sachs is optimistic that at this year's Jackson Hole Annual Symposium, Powell is more likely to give the market a "pleasant surprise."

Goldman Sachs pointed out that the current U.S. inflation has been controlled, and the labor market shows signs of deterioration. Against this background, Powell's speech this year will adopt a completely different tone from two years ago.

Goldman Sachs economist David Mericle said, "Possible dovish surprises could include a more concerned take on the labor market or any suggestion that the high level of the fed funds rate is inappropriate in light of the progress made on inflation."

In addition, on Wednesday of this week, the BLS suddenly significantly revised the U.S. employment data, which will also shake the Federal Reserve's determination to maintain a hawkish stance. The U.S. Department of Labor announced on Wednesday that the number of new jobs in the United States from last year to the beginning of this year was far less than previously reported. In the past 12 months up to March this year, the preliminary non-farm employment data was revised down by as much as 818,000 people.

"This might mean expressing a bit more confidence in the inflation outlook and putting a bit more emphasis on downside risks in the labor market," Mericle believes, "Powell might also reiterate that the FOMC is watching the labor market data carefully and is well positioned to support the economy if necessary."

Shock Is Also Possible

If Powell, as predicted by Goldman Sachs, makes a dovish statement, it is good for the stock market, because it will strengthen the market's confidence, believing that the Federal Reserve will start cutting interest rates at the FOMC meeting in September, and the magnitude of the cut may reach the market's expectations, or even more.

The CME's Federal Reserve Watch tool shows that investors expect that before the end of this year, there is more than a 40% probability that the Federal Reserve will cut interest rates by 100 basis points, and it may even cut by 125 basis points.

Of course, if Powell adopts a tone harder than investors expect, it may also bring a downward impact on the market.

Mericle said, "A possible hawkish surprise might be highlighting instead that broad financial conditions are still quite easy, which could imply that the high level of the fund's rate, while perhaps unnecessary, is not an urgent problem."

However, in Mericle's view, Powell is more likely to be dovish at the Jackson Hole Annual Symposium, because the latest July non-farm employment report was weak, and recent data also shows that the U.S. inflation rate is declining, approaching the Federal Reserve's 2% long-term target.

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