Powell's Jackson Hole Speech: Will the Fed Signal Rate Cuts?

Investors worldwide are keenly anticipating Federal Reserve (Fed) Chair Jerome Powell's speech at the annual Jackson Hole symposium, hosted by the Kansas City Federal Reserve Bank in Wyoming. This high-profile event, which brings together monetary policy experts, is often used by the Fed to signal future policy shifts. This year, the focus is particularly on whether Powell will hint at a potential interest rate cut at the September meeting, an expectation that has largely been priced into the markets. However, analysts caution that Powell may not play along as expected. The potential for disappointment looms large, potentially triggering significant volatility in financial markets. A key concern is that many policymakers appear worried about the potential for President Trump's tariffs to trigger inflation. "If Powell uses the Jackson Hole speech to draw a line in the sand – refusing to pre-commit to rate cuts or suggesting that market pricing has become detached from reality – this could trigger a sharp re-pricing in bond yields and risk assets," said Daniela Sabin Hathorn, senior market analyst at Capital.com.

Market Volatility Ahead of Speech

In the lead-up to Powell's speech, markets have already experienced some volatility. There has been a notable rotation of funds out of high-valuation large-cap tech stocks, leading to a 2.4% drop in the Nasdaq Composite Index so far this week. The S&P 500 Index has also declined by 1.2%, with both not far from the record closing highs they set last week. The Dow Jones Industrial Average, which has a smaller weighting of tech stocks, has fared relatively better, falling only 0.4% this week. The CME FedWatch Tool shows that Federal funds futures traders are currently pricing in a 73.5% probability that the Fed will cut the interest rate by 25 basis points at the September 16-17 meeting. They also expect at least one further 25-basis-point cut before the end of the year. These expectations have helped fuel the recent rally in the stock market.

Inflation Concerns

However, the market-implied probability of a September rate cut has receded from roughly 90% a week ago, reflecting more nuanced expectations about the economic outlook. Furthermore, wholesale costs for goods and services – an area where inflation often first appears – posted their biggest gain in three years in July, potentially signaling that price increases linked to U.S. tariffs will accelerate significantly. Moreover, the unemployment rate remains near historic lows, providing little logical justification for the Fed to ease policy in the near term. The minutes from the Fed's July meeting, released Wednesday, revealed that policymakers "generally expected inflation would run close to its symmetric 2 percent objective on a sustained basis." While there was disagreement about whether these price pressures would be short-lived, they agreed that higher costs would eventually hit U.S. businesses, which would have to pass costs onto consumers.

Powell's Possible Message

Given this backdrop, Callie Cox, chief market strategist at Ritholtz Wealth Management, suggests that Powell might throw cold water on investors' near-certain expectations for a September rate cut. "I expect he'll comment on the current environment – it's hard to imagine he's going to affirm the market's certainty of a rate cut in September with July's inflation and jobs data," Cox said. Shannon Saccocia, chief investment officer of wealth at Neuberger Berman, points out that equity investors are not only expecting a September rate cut but also craving assurances of further easing. "At this time last year, this speech set the tone for Fed action, so Friday's speech is critical, especially after Powell was perceived to be too hawkish at the last Fed press conference," Saccocia said. In conclusion, Powell's words could provide crucial guidance on whether these market expectations are reasonable. For a stock market that has enjoyed unusually low volatility and a seemingly sustained rally throughout the summer, volatility could be about to increase - if Powell indicates that policymakers need more data before re-launching an easing cycle that paused since last December, the bar for disappointment for stock-market investors is perilously low.

History Repeating Itself?

It is worth noting that investors have good reason to be cautious. In 2022, Powell's keynote speech at Jackson Hole ended a stock-market rally, as he affirmed that the Fed remained committed to curbing inflation through aggressive interest-rate hikes, even if it caused some pain for U.S. consumers and businesses. "Jackson Hole meetings have become more important in the last few years – but this year, the potential for a rate cut in about a month, plus the political pressure on the Fed, and the Chair especially, make Powell's comments more market-moving than we were anticipating," Saccocia concluded.

Political Pressure on the Fed

Powell's speech comes as pressure on the Fed from Trump and his allies has been growing. Trump has repeatedly attacked and insulted Powell, alleging that he hasn't re-started cutting interest rates quickly enough and calling for him to resign, though he hasn't attempted to fire Powell. Furthermore, Trump publicly demanded the resignation of Fed Governor Lisa Cook on Wednesday after Federal Housing Finance Agency Director Bill Pulte accused her of submitting fraudulent information on two mortgage applications. Cook has said she does not intend to resign and is gathering information to respond to the queries. U.S. stocks closed lower on Thursday, after economic data showed that weekly initial jobless claims rose more than expected, adding to worries about the labor market losing momentum.