The annual Jackson Hole Symposium is a significant event in the financial calendar, with investors closely watching for insights into the future direction of monetary policy. This year, all eyes will be on Fed Chair Jerome Powell’s speech scheduled for Friday at 10 a.m. ET.
The market is particularly sensitive to any short-term monetary policy guidance Powell might offer. Recall the 2022 symposium, when Powell’s suggestion that rates would likely need to stay restrictive for some time to curb inflation, coupled with the possibility of another 75 basis point hike, led to a sharp rise in Treasury yields and a decline in equities. The S&P 500, for instance, tumbled over 3%.
This time around, the focus is not on whether there will be a rate cut at the September Federal Open Market Committee (FOMC) meeting. Market participants already fully anticipate a reduction. The key question is the magnitude of that cut. According to the CME Group’s FedWatch tool, speculators favor a 25 basis point cut with a 75% probability.
Analysts expect Powell to strike a balance in his speech. While acknowledging the progress made on inflation, he’s likely to emphasize the downside risks to the labor market, a sentiment echoed by Goldman Sachs economist David Mericle. Such comments could reinforce market expectations of a September rate cut while leaving the specific size of the reduction to be determined by the August employment report.
Goldman Sachs anticipates three consecutive 25bp cuts in September, November, and December. However, a dovish surprise could emerge if Powell hints that the current interest rate level is inappropriately high. Conversely, a hawkish surprise might occur if he emphasizes that overall financial conditions remain relatively loose.
Ed Yardeni, president of Yardeni Research, warns that the market’s expectation of substantial rate cuts, potentially totaling 100-125 bps in the next six months, could lead to a decline in the entire Treasury yield curve. He anticipates Fed officials to counter these expectations if upcoming economic indicators exceed projections.
Bank of America predicts that Powell might adjust the July FOMC language to signal that the committee is nearing a decision to begin easing. This could be further reinforced by Powell placing greater emphasis on preventing unexpected weakness in the labor market, rather than simply responding to such weakness after it occurs.
Mark Cabana, Bank of America’s rates strategist, highlights the potential for more hawkish Fed communication. If Powell doesn’t signal a September rate cut or suggests that large-scale rate reductions are off the table, it could lead to a significant flattening of the Treasury yield curve.
Toronto Dominion expects Powell to signal the Fed’s readiness to initiate its anticipated easing cycle in September. Recent positive economic data, particularly on inflation, should support Powell in signaling this readiness. However, they remain cautious about whether Powell will explicitly commit to the size of the rate reduction.
