Here’s how Jerome Powell could surprise markets with his Jackson Hole speech

• Goldman Sachs says Jerome Powell’s speech in Jackson Hole on Friday could provide some surprises.

• It wouldn’t be the first time he used the event as an opportunity to reset investor expectations.

• Markets are expecting rate cuts of 100 basis points between now and the end of the year.

All eyes are on Jerome Powell’s speech at the Federal Reserve’s Jackson Hole Symposium on Friday, and Goldman Sachs says the central bank chairman may yet surprise investors despite their confidence in the Fed’s path for the rest of the year.

It wouldn’t be the first time Powell used his Jackson Hole speech as an opportunity to reset market expectations.

In 2022, with inflation at a 40-year high, Powell gave a short but to the point eight-minute speech that reinforced the Fed’s path to raising interest rates to fight inflation, even as the stock market in the middle of a painful bear market.

Bond yields rose and the S&P 500 lost nearly 8% in the week after Powell’s Jackson Hole speech.

But with inflation nearly under control and the labor market showing signs of deterioration, Powell could strike a much different tone on Friday.

And according to Goldman Sachs, there are a few ways the Fed chief could catch the markets off guard.

“Possible dovish surprises could include a more worried approach to the labor market or any suggestion that the high level of the federal funds rate is inappropriate in light of progress on inflation,” Goldman economist David Mericle said in a note on Tuesday.

Such an event would likely be bullish for the stock market, as it would reinforce the idea that the Fed will begin cutting interest rates at the Federal Open Market Committee meeting in September and that the bar for a cut of more than 25 basis points or a string of consecutive cuts is lower than most expect.

CME’s FedWatch tool suggests investors will see 100 basis points of interest rate cuts through the rest of this year.

On the other hand, Powell could shock bear markets if he takes a louder tone than investors expect.

“A possible driver surprise could instead highlight that overall financial conditions are still quite easy, which could imply that the high level of the funds rate, while perhaps unnecessary, is not an urgent problem,” Mericle said.

Mericle ultimately expects Powell to be more dovish in his Jackson Hole speech given July’s lackluster jobs report and recent data showing inflation falling closer to the Fed’s long-term target of 2%

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The recent downward revision to employment growth of 818,000 jobs also does not help the Fed’s case for remaining accommodative.

“This could mean expressing a little more confidence in the inflation outlook and placing a little more emphasis on downside risks in the labor market,” the note said. “Powell could also reiterate that the FOMC is watching labor market data closely and is well positioned to support the economy if needed.”

Goldman Sachs also held a briefing on Powell’s Jackson Hole speeches and their impact on Treasury yields since he became Fed chairman in 2018.

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