Powell's Jackson Hole speech may not surprise the market, market is confident that the Fed will cut interest rates in September

Intelligent Finance APP noticed that although the policy speech by Jerome Powell, the Chairman of the Federal Reserve, on Friday was highly anticipated, the likelihood of any surprising news seems small.

After all, the market has made up its mind: the Federal Reserve will begin cutting interest rates in September and is likely to continue cutting rates until the end of 2025.

While there are still some questions regarding the extent and frequency of rate cuts, Powell now needs to give a brief review of the current situation and provide some limited guidance on future developments.

"If you've heard this before, don't say it again: they still rely on data," said Lou Crandall, former Federal Reserve official and current Chief Economist at Wrightson-ICAP. He has worked at the central bank for over 40 years.

He expects Powell "to be clear in direction, but the specific pace and timing of rate cuts will depend on the data from now until the meeting. There is no doubt that they will start cutting rates in September."

Powell's speech will be delivered at the annual global central bank governors' meeting in Jackson Hole, Wyoming at 10 a.m. Eastern Time. The theme of this meeting is "Reassessing the Effectiveness and Transmission of Monetary Policy," and the meeting will continue until Saturday.

If anyone had doubts about the Fed's intention to implement at least a quarter-point rate cut at the Federal Open Market Committee meeting on September 17-18, those doubts have dissipated on Wednesday. The minutes of the July meeting show that "the vast majority" of members support a rate cut in September unless there are unexpected circumstances.

Philadelphia Fed President Patrick Harker further emphasized this view in an interview on Thursday, stating, "We need to start the rate-cutting process in September."

Rate Cut Guidance

A major question is whether the first rate cut in over four years will be 25 basis points or 50 basis points, and Harker declined to answer that question. According to CME Group's FedWatch, the market is betting on a 25-basis-point cut, but the probability of a 50-basis-point cut is around 25%.

A 50-basis-point cut may require a significant deterioration in economic data from now until then, especially following another weak non-farm payrolls report in two weeks.

Crandall said, "While I think the Fed's base expectation is for a quarter-point cut, my base expectation is for a quarter-point cut, but I don't think they will feel the need to provide any guidance for such a distant future."

Over the past few years, Powell has used the Jackson Hole speech to outline broad policy measures and provide clues about the future of policy.

In his first appearance in 2018, he outlined his views on interest rates and unemployment, considering interest rates and unemployment to be "neutral" or stable. A year later, he hinted at an upcoming rate cut. In a speech during the 2020 racial protests, Powell unveiled a new approach that would allow inflation to run hotter than usual without raising rates to promote a more inclusive job market. However, this "flexible average inflation target" will lead to a period of price spikes, putting Powell in a delicate policy balancing act over the next three years This time, his task will be to confirm market expectations while also indicating his impression of the economy, especially the easing of inflation pressures and some concerns about the labor market.

Jack Janasiewicz, Chief Portfolio Strategist at Natixis Investment Managers Solutions, said: "For us, the key will be Chairman Powell's tone, and we expect him to lean towards 'dovish' or lower rates." In short, inflation continuing to trend towards the 2% target seems to exceed consensus. Coupled with signs of a softening job market, people may feel there is no need to maintain a hawkish stance.

Listening to the Market

The Federal Reserve has kept its overnight borrowing rate unchanged for the past 13 months after several significant rate hikes. Under a high-interest rate regime, market performance is usually good, but after the July meeting, there was some resistance in the market due to signs of deteriorating labor market conditions and weak manufacturing.

It is expected that Powell will at least acknowledge some economic headwinds and the progress the Fed has made in combating inflation.

Goldman Sachs economist David Mericle stated in a recent report: "Given the data released since then, we expect Powell to express greater confidence in the inflation outlook than he did at the press conference following the July FOMC meeting, and to emphasize more the downside risks to the labor market."

Goldman's policy is broadly in line with market expectations: interest rate cuts are expected at the next three meetings, followed by further policy easing in 2024, ultimately lowering the federal funds rate by about 2 percentage points—this policy path will be very broadly outlined by Powell at the Jackson Hole conference.

The Fed chair claims to be insensitive to financial market trends, but Powell undoubtedly saw the reaction after the July meeting and hopes to alleviate concerns that the central bank will continue to wait before beginning to ease policy.

Komal Sri-Kumar, head of Sri-Kumar Global Strategies, said: "Powell tends to support the stock market. He has repeatedly stated that rates will fall. Rates have not fallen yet, but this time, he will do so."