Fed Chairman Powell’s Jackson Hole speech could disappoint markets

Federal Reserve Chairman Jerome Powell will take the stage at the central bank’s annual retreat in Jackson Hole on Friday with renewed confidence that inflation is retreating and the economy is poised, albeit delicately, for a so-called soft landing.

That knowledge, cemented by recent data, a resilient stock market and receding recession risks, will likely set the tone for his keynote address to attendees at the central bank’s symposium in the northwest Wyoming resort town, which will be watched by investors on Wall Street and around the world.

What it won’t do, however, is the case for a huge Fed interest rate cut in September, which markets have been banking on for months. And that could lead to a muted, or even negative, market reaction to his speech, scheduled for 10 a.m. ET.

“We expect Chairman Powell on Friday to confirm easing in September, which will be accompanied by forecasts for higher unemployment and lower inflation than in the June Summary of Economic Projections,” said Ian Shepherdson of Pantheon Macroeconomics.

“But we think he will try to lower expectations by 50 basis points, as well as reiterate that the Fed is data-driven and not making decisions in advance,” he added. “Still, who will listen?”

Global markets will be glued to Fed Chairman Jerome Powell’s keynote address in Jackson Hole on Friday.

Everyone will be listening, of course, but they will want to hear what will likely be a cautious outlook from a Fed chairman who has been heavily criticized for keeping rates too high and for too long as growth and is inflation moderating?

Fed Dovish minutes

Minutes from the Fed’s July meeting, released on Wednesday, suggest that “several” policymakers may have supported a rate cut in July, while the “broad majority” agreed that a September cut would would be appropriate if the data supported it.

These views, it should be noted, were expressed ahead of July’s softer-than-expected jobs report, as well as the consumer price index and core personal consumption expenditure inflation readings, which showed price pressures at the lowest level in about three years.

Policymakers also talked about the pace of consumer spending, which “slowed from last year’s robust pace, consistent with tight monetary policy, easing labor market conditions and slowing income growth,” according to the minutes.

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Markets are using those comments, as well as yesterday’s revision of job creation estimates from the Bureau of Labor Statistics, to make the case for a 50 basis point, or 0.5 percentage point, rate cut from the Fed next month .

The BLS cut 818,000 jobs from its overall growth estimate for the 12 months ended in March, a revision that lowered the average monthly gain to 178,000 from 246,000.

James Knightley, chief international economist at ING investment bank in the Netherlands, said the recalculation “adds to the doubts about the quality of the jobs numbers” received by investors since March.

Cooling labor market data

“Given that everything was weak in the last July jobs report — weak wages, rising unemployment, fewer hours worked and lower wages — the update will only put more pressure on the Fed to ease monetary policy” , he added. “Momentum is being lost from an even weaker position than originally thought.”

CME Group’s FedWatch actually pegs the odds of a bigger Fed rate cut at about 26.5%, with the odds of a quarter-point cut at 73.5%.

For the Fed’s November meeting, which comes just two days after Americans go to the polls on the fifth day, it’s basically a toss-up between a half-point cut and a quarter-point cut.

Philadelphia Fed President Patrick Harker told Reuters during an interview on Thursday that “barring any surprise in the data that we get between now and then, I think we need to start that process” of cutting rates in September .

But he added that “I think a slow, methodical bottom-up approach is the right way to go.”

Boston Fed President Susan Collins also told Fox Business that a “gradual, methodical pace” of rate cuts is “probably appropriate.”

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That’s a message Powell is likely to address during his speech in Jackson Hole on Friday, as the latest jobs and growth data continue to point to broader economic resilience.

About 230,000 Americans filed for unemployment benefits for the first time last week, a modest increase from the previous period but a figure that is largely unchanged from a year ago levels.

Meanwhile, a closely watched August survey of business activity from S&P Global, meanwhile, pointed to continued GDP growth in the second month of the third quarter, fueled by the all-important services sector .

Economic growth still solid

“August’s solid growth chart points to robust GDP growth of more than 2% annualized in the third quarter, which should help ease near-term recession fears,” said chief economist Chris Williamson. “Similarly, falling sales price inflation to near the pre-pandemic average signals a ‘normalization’ of inflation and adds to the case for lower interest rates.”

Meanwhile, stocks continue to rise, with the S&P 500 now within striking distance of the all-time peak it hit in July, even as heavyweight Magnificent 7 stocks this quarter outperformed the market for the first time in two years.

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• The CPI report upsets the bet on a big Fed rate cut
• Main Street businesses are pushing back into the Wall Street recession

Will these recent gains, which have helped lift the S&P 500 8.6% from early August lows, be tested by a cautious speech from Powell?

Historically, the S&P 500’s reactions to Jackson Hole speeches have been significant, often moving more than 1%

Fed Chairman Powell will speak at the event on Friday evening

Markets have already priced in a September interest rate cut, potentially limiting markets’ upside. pic.twitter.com/4vutS92lfJ

— nitin hajare (@nitinhajare_) August 21, 2024

It’s certainly possible, given that Powell is likely to focus only on the September meeting, leaving the market to focus on broader election risks and earnings growth in the coming months.

Bond markets are also not behaving as bullishly as stocks, with 10-year note yields now trading higher (ie, lower) than before the global market turmoil triggered by the yen trade turmoil on August 5.

Rate-sensitive 2-year yields are about 14 basis points higher than they were in early August. At last check, they changed hands at 4.004%.

“The market is clearly on edge with no Fed meeting in October,” said Geoff Strotman, senior vice president at Segal Marco Advisors.

“With the PCE inflation data, the Fed’s preferred inflation gauge, due out on August 30th and the jobs data on September 6th, if Powell can set clear railings around these economic numbers, we should be able to get more easy in September. “

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