Market Expectations Ahead of Powell's Jackson Hole Address

Traders are keenly anticipating Federal Reserve Chair Jerome Powell's address at the annual Jackson Hole Economic Symposium, held in Wyoming. This significant event aims to offer insights into the future trajectory of the US central bank's monetary policy. Powell has long advocated for a more cautious approach to policy actions, but the market is curious whether his perspective has shifted in the wake of a series of recent economic data releases, especially as the market has already priced in expectations of a September rate cut.

Analyzing Recent Economic Data

Previous data revealed a significant weakening in US job growth last month, with substantial downward revisions to prior data for June and May. Concurrently, CPI inflation remained relatively moderate, while PPI inflation unexpectedly surged, and retail sales experienced strong growth. This data paints a complex picture: the labor market may be slowing, while tariff-driven inflationary pressures persist, albeit relatively muted. This raises questions about the sustainability of current economic growth.

Analyst Perspectives

ING analysts believe the Fed's September meeting could be "explosive," as it may represent the latest chapter in the ongoing "tug-of-war" between Powell and former President Donald Trump, who criticized the Fed Chair for not advocating for rapid rate cuts to boost the economy. On the other hand, Goldman Sachs analysts suggest that weak job growth and concerns about further negative revisions to jobs data may have prompted Fed policymakers to decide to re-launch the rate-cutting cycle. The bank noted in its report that the labor market may experience a state of "mediocrity" in the coming months due to "weak growth in economic activity and special factors" (such as massive staff reductions at the White House and tighter US immigration enforcement). Analysts argue that these changes, coupled with the impact of tariff-induced economic uncertainty on hiring, "will support" their forecast that the Fed will cut interest rates by 25 basis points in each of September, October, and December, followed by two more cuts next year. It is worth noting that geopolitical developments could further amplify this uncertainty. "A 50 basis point rate cut is also possible, but that would require a much larger increase in the unemployment rate or worse jobs data than we expect," they added. In contrast, Barclays analysts believe that despite the weak US labor market data, Powell's recent stance supporting a "wait-and-see" approach to future policy is unlikely to change. The bank stated in its report that there are few signs that more hawkish members of the Federal Open Market Committee (FOMC) have "changed their stance," adding that a rate cut at the Fed's September meeting remains "on the table." They insist on their forecast that the Fed will cut interest rates once this year, but not until the December meeting. Analysts believe Powell is expected to release more guidance later this week. "If Powell reiterates his previous statements, this may reduce expectations of a September rate cut; while if he emphasizes labor market weakness, it may cement expectations of a September rate cut," Barclays analysts stated. According to CME Group's FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points at its September 16-17 meeting is slightly less than 85%.

July FOMC Meeting Minutes

The Fed also released the minutes of its July monetary policy meeting on Thursday, in which the Fed decided to keep its benchmark interest rate in the 4.25%-4.5% range. However, this decision faced opposition from two officials, a rare occurrence in decades. Fed Governor Waller and Vice Chair for Supervision Bowman both called for a rate cut, saying it was necessary to support the weak labor market.

Conclusion

Powell's Jackson Hole speech will significantly impact market expectations, as investors await any signals about the Fed's future monetary policy direction. Given the mixed economic data and differing views among analysts, the outcomes of this meeting will largely determine market sentiment in the months ahead.