Jerome Powell prepares to signal Fed policy shift in Jackson Hole speech

• Fed Chairman Jerome Powell is scheduled to speak on monetary policy at the Jackson Hole Symposium.
• All eyes remain on Powell’s speech for fresh clues on the US interest rate outlook.
• The US dollar is hurt by Powell’s speech after Wednesday’s Fed minutes.

US Federal Reserve (Fed) Chairman Jerome Powell is scheduled to deliver a speech titled “Reassessing the Effectiveness and Transmission of Monetary Policy” on the second day of the annual Jackson Hole Economic Symposium at 14:00 GMT on Friday.

Market participants will be closely watching Powell’s speech for any new clues about the path of monetary policy, particularly about the size of the Fed’s first rate cut in years and the potential size and timing of further rate cuts.

His words are expected to rouse markets, injecting intense volatility around the US dollar (USD) as the world’s most powerful central bank heads for a policy pivot as early as September.

At the July policy meeting, the Fed left the federal funds rate unchanged in the range of 5.25%-5.50% and shifted its focus to the second strand of its dual mandate – full employment.

Fed Chairman Powell said during the post-policy meeting press conference that the labor market “has come into better balance.” “We are mindful of the risks on both sides of the dual mandate,” Powell said, a shift from earlier saying they were “very mindful” of inflation risks.

“The unemployment rate remains low. The data suggests that the labor market has returned to where it was on the eve of the pandemic. A broad set of labor market indicators show it is strong but not overheated,” Powell added.

Since then, other Fed policymakers have expressed concern about the strength of the labor market.

However, US employment data for July came in weak and fueled recession fears. Nonfarm payrolls rose by 114,000 jobs last month, after rising by a downwardly revised 179,000 in June, according to the US Bureau of Labor Statistics (BLS). The unemployment rate rose to 4.3% from 4.1% in June.

Markets have started pricing in a roughly 75% chance of a 50 basis point (bps) interest rate cut by the Fed in September, while predicting 115 bps of cuts this year, with more to go only three scheduled Fed meetings.

Following the release of US consumer price index (CPI) data, the odds of a big Fed rate cut have fallen. Although the annual US inflation rate slowed for a fourth consecutive month to 2.9% in July, the lowest since March 2021, compared with 3.0% in June, the monthly CPI rebounded by 0.2% last month, after a 0.1 percent decline in June, BLS. reported on August 14.

Recession fears were quelled last week after a strong retail sales report and encouraging jobless claims data pointed to economic resilience. Despite the encouraging US economic outlook, the downright dovish Minutes of the July Fed meeting and the Benchmark Review of Non-Farm Wages have markets still pricing in a 35% chance of a 50bps cut for September, while the odds of a 25 bps rate cut are at 65%.

Most policymakers felt that “if the data continues to emerge as expected, it would probably be appropriate to ease the policy at the next meeting,” the Minutes said. In addition, the minutes mention that many of them would have even been willing to reduce the cost of the loans already in the July meeting.

Meanwhile, the US Department of Labor said non-farm payrolls (NFP) for April 2023-March 2024 were cut by 818,000. The revision represented a total downward change of about 0.5 percent, prompting Fed policymakers to consider the indication that the labor market was weaker than previously thought as they factored in the pace of rate cuts.

Against this background, the US dollar (USD) is preparing for a two-way risk in the run-up to the highly anticipated showdown in Jackson Hole.

How could Powell’s Jackson Hole speech affect the US dollar?

Even though Fed Chairman Jerome Powell confirmed a September rate cut at his press conference, he is unlikely to commit to a specific rate cut path in advance. However, if it defies expectations for aggressive easing, sticking to the bank’s data-driven approach, the US dollar could see new signs of life against its major peers.

If Powell explicitly notes that the Fed has gained enough confidence in inflation progress while admitting to weakening labor market conditions, markets are likely to step up bets for a large and aggressive rate-cutting cycle in the coming months . This could provide additional legs for the ongoing fall of the US dollar.

Markets are betting on up to a percentage point of rate cuts by the end of this year, according to Reuters.

FXStreet analyst Dhwani Mehta provides a brief technical outlook for the US Dollar Index (DXY):

“DXY is very oversold in the daily time frame and therefore a decent recovery in the coming days cannot be ruled out. The 14-day Relative Strength Index (RSI) is trending below the 30 level, currently near 25, suggesting upside risks remain intact for the US Dollar Index.

“If the downtrend continues, the next cushion is seen at the psychological barrier of 100.50, below which the 100.00 threshold will be tested. Additionally, the July 18, 2023 low of 99.57 will be on sellers’ radars. On the other hand, buyers need to find acceptance above the static resistance at 102.00 for an extended recovery towards the August 8 high of 103.54,” adds Dhwani.