Inflation, Interest Rates, and Powell: What to Expect from Jackson Hole

This Friday, all eyes will turn to the rolling mountains of Wyoming - where economists and central bank governors from around the world will gather at Jackson Lake Lodge in Grand Teton National Park to share their latest views on the current global economic situation. Among them, the keynote speech by Federal Reserve Chairman Jerome Powell at 10 a.m. New York time on Friday is particularly anticipated.

After maintaining high interest rates for nearly two years, the US economy and the $27 trillion US Treasury market are considered to be at a high-risk moment. With the release of various recent economic indicators, the Federal Reserve is at a crucial crossroads in monetary policy: just like the theme of this year's meeting, the Federal Reserve needs to make a reasonable assessment of the current tight monetary policy and give the market a satisfactory response at the interest rate meeting next month.

It's highly likely Powell will use his Jackson Hole address to declare it will soon be the 'appropriate' time to cut rates. So attention will focus on a narrower question: Will he or won't he signal an openness to a 50-basis-point move? , said some economists when talking about their expectations for Powell's speech.

What Will Powell Say?

After entering 2024, both ordinary stock investors and professional bond traders are trying to predict the timing and speed of the Federal Reserve's rate cut cycle, but more than half a year has passed, and the first cut that should have occurred in March has not yet happened. As time goes by, the confidence in the prediction has finally turned into anxiety while waiting, especially now the US economy seems more unpredictable than a few months ago.

Although the economic data in recent months have shown that inflationary pressures in the United States have eased significantly, there is still a lot of time needed to reach the Federal Reserve's 2% target. The problem is that recent employment reports and consumer spending in the United States seem to indicate that there is not much time left for the Fed.

Economic data is difficult to interpret, which means the content of Powell's speech has become less predictable.

There could be an argument for going a little bit faster upfront and then slowing, said Matthew Luzzetti, Chief US Economist at Deutsche Bank. Pooja Sriram, an economist at Barclays, believes: We expect him to acknowledge that conditions are in place for them to begin dialing back policy soon.

Tom Lee of Fundstrat said in an interview last week: I think Jackson Hole is going to set a positive tone on balance just because the evidence is growing FOMC members want to be forward-looking.

However, Ed Yardeni, a senior market observer at Yardeni Research, believes that Powell's speech may not be pleasing to everyone, as the Federal Reserve Chairman will not only reiterate that the economy is performing well under the current high interest rate environment but may also further eliminate the market's long-term outlook for rate cuts.

[Chair Powell] is also likely to push back on expectations of cuts in November and December, Yardeni wrote.

How Will The Market React?

However, some views suggest that unless Powell sends a clear signal in his speech on Friday, it will not trigger a warm response from the market, as all assets should have already digested any dovish expectations.

After the disappointing employment report in July, the S&P 500 has recovered from the sharp decline at the beginning of the month, rising by about 8%. More importantly, the S&P 500 seems ready to set a new high, less than 1% away from the historical high in July. The U.S. moving towards a soft landing is one of the key driving factors, just as the Federal Reserve did in 1995 when facing inflation.

Wells Fargo pointed out in a report this week that at that time, the S&P 500 soared by more than 40% within 18 months after the first rate cut by Federal Reserve Chairman Alan Greenspan.

At the same time, traders in the bond market have placed huge bets: data shows that before this week's Jackson Hole Global Central Bank Annual Meeting, the number of leveraged positions in US Treasury futures has risen to a historical high - last week, the open contracts for 10-year Treasury futures reached a record high of nearly 23 million.

As a result, some market observers believe investors should be prepared for further fluctuations. They point out that the sharp fluctuations in the CBOE Volatility Index (VIX), also known as Wall Street's fear index, is an alarming market signal - its rise indicates that investors have begun to embrace risks.

Powell's speech tomorrow may become the source of a new round of fluctuations: now, the CME's FedWatch tool shows that the market's expectation for the interest rate cut this year is to drop a full percentage point from the current 5.25%-5.50% to 4.25%-4.50%. However, judging from Powell's previous remarks, he does not like to endorse market expectations. Last month, when asked about the issue of the magnitude of the rate cut, Powell said, I don't want to elaborate on what we are going to do.

Although this tight-lipped speaking style can effectively avoid the market's misinterpretation, this uncertainty may not be what the market needs.