What will Jerome Powell say at the Jackson Hole Symposium? Don't expect too much

Wall Street is betting that Federal Reserve Chairman Powell will confirm a rate cut at the central bank's annual meeting in Jackson Hole, Wyoming. However, as the debate shifts from "will there be a rate cut" to "how big will the rate cut be," stock traders may find it hard to meet expectations.

Eric Beiley, Managing Director of Wealth Management at Steward Partners Global Advisory, said, "If traders hear that a rate cut is coming, the stock market will react positively. If we don't hear the news we want, it will trigger a big drop."

This is the challenge fund managers are facing as they have just reinvested heavily in large tech stocks, chasing the continuous rise of the S&P 500 index. The market fully expects the Fed to start cutting rates at the upcoming meeting in September. However, Powell is likely to remain silent on the timing of the rate cut in his speech on Friday. Moreover, taking a cautious and non-committal stance on how much the Fed might cut rates also aligns well with his character.

"The market is confident that a rate cut is coming," Beiley said. "If Powell doesn't reinforce this, it will be a huge surprise."

After the global economic growth fears triggered the most severe drop of the year in early August, this "surprise" could disrupt the strong rebound of the $3.3 trillion S&P 500 index. According to data from EPFR Global cited by Bank of America, investors poured $5.5 billion into the U.S. stock market in the week ending last Wednesday, with the benchmark index rising for seven consecutive trading days.

Since the low point in August, the market capitalization of the S&P 500 has grown by over $3 trillion.

However, some Wall Street professionals warn investors not to have overly high expectations for the Fed Chairman's speech.

Tom Hainlin, National Investment Strategist at Bank of America Wealth Management, said, "Based on Powell's past speeches at Jackson Hole, he is unlikely to make very definitive statements."

Bill Dudley, Bloomberg Opinion columnist and former New York Fed President, believes that Powell may suggest that monetary policy tightening is no longer necessary, but he does not expect Powell to signal the size of the first rate cut, especially as officials need to consider the employment report on September 6 before making the next policy decision on September 18.

"His tone is crucial," said Stephanie Lang, Chief Investment Officer at Homrich Berg. "If he surprises the market and appears hawkish, the stock market will react negatively."

To be clear, traders fully expect the Fed to cut rates at the next meeting, but they are unsure of how big the rate cut will be. With few officials scheduled to speak in the coming days, Powell's speech is of utmost importance According to data from Citigroup, based on the cost of put and call options at parity, options traders expect the S&P 500 index to fluctuate by 1% on Friday.

Nevertheless, Wall Street is still hoping that the pain of this summer is over, with the S&P 500 index still 2% below its historical high. Data compiled by Bloomberg shows that open interest in options betting on a decline in the Cboe Volatility Index is hovering near the highest level since June 2022, compared to contracts betting on an increase.

Interest rate cuts have historically been used to prevent economic growth from slowing down. Due to signs indicating the current vitality of the U.S. economy, traders have reduced their bets on a significant rate cut in September, with the current priced-in rate cut of around 30 basis points. Bank of America's Heinlin believes that this means the market risks brought by the Jackson Hole meeting are diminishing, and investors are no longer expecting aggressive rate cuts.

Heinlin said, "We want to know what the Fed's rate path will be, whether it will cut rates at every meeting or still depend on employment and inflation data. But he may not say that. Traders are more likely to get this information at the Fed's September meeting."

The Fed chair's speech at Jackson Hole usually does not have a significant catalytic effect on the stock market, unless it is before a key change in monetary policy - like now. Data compiled by Bloomberg Intelligence shows that since 2000, the S&P 500 index has averaged a 0.4% increase in the week following the meeting.

Traders still remember Powell's speech at Jackson Hole in August 2022, when he warned that the Fed needed to maintain a restrictive monetary policy to combat inflation. The stock market plummeted 3.4% that day and fell another 3.3% in the week after his speech. However, this time, investors hope that the Fed has achieved the goal of a soft landing, avoiding price control without causing severe economic pain. Therefore, expectations are quite the opposite, anticipating a significant increase.

There are three more FOMC policy meetings in 2024. Traders are betting that as inflation falls back to the 2% target, the Fed will cut rates in response to signs of weak employment. In July, the potential Consumer Price Index fell for the fourth consecutive month, while strong retail sales data indicate that Americans' spending remains robust, allowing officials to adopt less aggressive policies.

"Powell doesn't need to scare the market," said Lan from Homrich Berg. "He needs to make the market believe that inflation is receding, and officials can confidently lower restrictive rates to a more neutral level." ”