What did Powell say at the Jackson Hole annual meeting? Traders focus on rate cut signals, fearing a huge shock to the US stock market this Friday

During the annual central bank symposium held in Jackson Hole, Wyoming on Friday, August 23 local time, Federal Reserve Chairman Powell will deliver a highly anticipated speech. Wall Street expects Powell to use this opportunity to confirm the Fed's upcoming rate cut, shifting the focus of debate among stock traders from whether or not the Fed will cut rates to how much the Fed will cut.

Eric Beiley, Wealth Management Executive Director at Steward Partners Global Advisory, said:

"If traders hear that a rate cut is imminent, the stock market will react positively. If we don't hear the news we want to hear, it will trigger massive selling."

"The market is very confident that a rate cut will come soon. If Powell does not emphasize that this is the path forward, it will come as a surprise."

Bloomberg macro strategist Simon White believes that Powell has the opportunity this week to emphasize that the risk of a recent economic recession in U.S. stocks is limited, further reducing the risk of asset prices being negatively impacted by the economy. He will undoubtedly emphasize the Fed's data-dependent response function, but he can also highlight the relative health of the U.S. economy, thereby reducing the risk of market feedback loops triggered by a recession. The expected rate cut seems to still be easily influenced by repricing.

However, some Wall Street professionals warn investors not to expect Powell to provide too many clear statements. For example, Tom Hainlin, National Investment Strategist at US Bank Wealth Management, said:

"Looking back at speeches in Jackson Hole, we are unlikely to get very clear comments from Powell."

Some believe that the key to maintaining market sentiment is not what Powell says, but his tone. Stephanie Lang, Chief Investment Officer at Homrich Berg, said:

"His (Powell's) tone is crucial. If his comments shock the market and his attitude is firm, the stock market will react negatively."

Former Fed "number three" and New York Fed President from 2009 to 2018, William Dudley, suggested that Powell may imply that a tightening monetary policy is no longer necessary, but he will not indicate how large the first rate cut of this round will be, especially considering the non-farm payroll report to be released on September 6, Fed officials need to consider this heavyweight report before making decisions at the next Fed meeting on September 18.

Currently, traders generally expect a rate cut by the Fed in September, but are uncertain about the size of the cut. With few public speeches by Fed officials in the early days of this week, Powell's comments on Friday are particularly important. Citigroup believes that this is why options traders expect the S&P 500 index to fluctuate in any direction by more than 1% on Friday, a prediction based on the cost of at-the-money call and put options.

Last week, Wall Street News mentioned that in recent years, Powell's speeches at the Jackson Hole symposium have often caused major turbulence in the U.S. stock market. For example, in 2022, Powell's speech spooked the U.S. stock market, with the "painful" theme directly leading to a 3%-4% plunge in the three major U.S. stock indexes within just 9 minutes In 2023, the market saw some turbulence, with the Dow posting its largest point drop in five months on the Thursday before Powell's speech, and the Nasdaq falling nearly 2%.

On Monday of this week, some comments suggested that due to signs of economic resilience, traders have reduced their bets on a significant rate cut in September, with an expected cut of around 30 basis points. Hainlin stated that this indicates the market risks from the Jackson Hole meeting are diminishing, and investors are no longer expecting a substantial rate cut. He said, "We want to know what the actual rate path of the Fed is, whether it will cut rates at every meeting or still depend on employment and inflation data. But he (Powell) may not say that. Traders are more likely to get this information through the Fed's September meeting."