Jackson Hole Preview: Will Powell's Speech Set Path for The Anticipated September Cut?

Next week, the annual Jackson Hole Symposium will be held at the Jackson Lake Lodge in Grand Teton National Park, Wyoming.

Amid global concerns about economic recession and central banks at a policy turning point, this event is highly anticipated. The speech by Federal Reserve Chairman Jerome Powell will undoubtedly be the focus of market attention.

The Jackson Hole Symposium is one of the oldest central bank conferences in the world and is also known as the Davos Forum for Central Bankers. Since 1978, the Federal Reserve Bank of Kansas City has been responsible for hosting this annual economic policy meeting. Central bank officials from around the world, Nobel laureates, and top scholars gather in this small town in Wyoming every year in August and September to discuss the most pressing issues of the global economy and monetary policy.

Setting the Tone for the September Rate Cut

According to the Federal Reserve's updated schedule on Thursday, Powell will deliver a keynote speech at the Jackson Hole Symposium at 10 a.m. Eastern Time on August 23 (10 p.m. Beijing Time on August 23). This year's meeting continues the tradition of the Federal Reserve Chairman delivering a keynote speech during the three-day central bank annual meeting.

The meeting provides Powell with an opportunity to make the latest assessment of the trajectory of the U.S. economy and the prospects for monetary policy between the Federal Reserve's policy-making meetings in July and September. Powell is widely expected to give clues about monetary policy when delivering the opening speech at the Jackson Hole Symposium.

To combat high inflation, the Federal Reserve began raising interest rates in March 2022, pushing the benchmark interest rate from near zero to the current range of 5.25%-5.50%. Since July 2023, the interest rate has remained at this level.

Given the cooling of inflation and the slowdown of the labor market in the United States in the past few months, the financial market generally expects the Federal Reserve to start a rate-cutting cycle at the meeting on September 17-18.

However, there are still disagreements in the market about the extent of the rate cut. Although most economists expect the Federal Reserve to cut rates by 25 basis points in September, some industry insiders predict that there may be a more substantial rate cut of 50 basis points. There are even calls for the Federal Reserve to cut rates earlier.

Given the mixed economic data recently released in the United States, people oscillate between the U.S. economy will fall into a recession and the U.S. economy will not fall into a recession. This is also the main reason for the market's divided views on the prospects for rate cuts.

Earlier this month, the U.S. July non-farm employment report unexpectedly turned cold. The report showed a sharp deterioration in the job market, with the unemployment rate rising to the highest level in nearly three years. In addition, several U.S. economic data such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) in July were lower than expected, pointing to a slowdown in U.S. inflation, paving the way for the Federal Reserve to cut interest rates.

However, the U.S. retail sales and initial jobless claims data released on Thursday were better than expected, easing concerns about an economic recession and bringing the prospect of a soft landing back into view. This seems to have eased the urgency for the Federal Reserve to make a substantial rate cut.

Economists say that Powell will pave the way for the rate cut in September at next week's Jackson Hole symposium, and the most concerned actual extent of the rate cut will be determined by the employment data to be announced a week later in August.

Krishna Guha, Vice Chairman of Evercore ISI, said in a note to clients that Powell will set the tone for future monetary easing, leaning towards proactive rather than passive on the issue of rate cuts. The specific details will be determined after the August employment data is announced on September 6.

This is now a labor data-first Fed, not an inflation data-first Fed, and the incoming labor data will determine how aggressively the Fed pulls forward rate cuts, Guha said.

Will the Market Experience a Huge Shock?

For investors, what kind of reaction Powell's speech at the Jackson Hole Symposium will bring to the market is the most concerning question. It is worth noting that the U.S. stock market often experienced huge shocks during Powell's speeches.

For example, in August 2022, Powell delivered a hawkish speech at Jackson Hole, stating that some pain is needed to quell inflation and reiterating a tough stance on inflation. This hawkish speech directly hit the U.S. stock market, with the Dow Jones Industrial Average falling by more than 1,000 points, a drop of 3%, the S&P 500 index fell by 3.4%, and the Nasdaq fell nearly 4%.

Over the past month, U.S. stocks have intensified their volatility. Last Monday, with the global market sell-off, U.S. stocks had their worst day in more than two years. However, the S&P 500 index has risen by nearly 17% so far this year.