Bank of America analyst provides a "reassurance pill": no need to worry too much about Powell's loose talk

Federal Reserve Chairman Powell will deliver a speech at the Jackson Hole Central Bank Annual Symposium in Wyoming, continuing the tradition of investors, economists, and central bank officials at the end of summer. People have high hopes for this.

This time, investors are eager to confirm that the Fed is following the plan to cut interest rates starting in September. Perhaps more importantly, any clues about the pace, scale, and scope of future rate cuts by the Fed, apart from the next month's policy meeting.

Data from BNY Mellon shows that on the day Powell speaks, the U.S. stock market tends to perform positively, without being overly optimistic, except for 2019 and 2022.

As shown in the chart, since 2018, the median increase in the S&P 500 index on the day of the Fed Chair's speech is 0.4%. However, the average trend is a decrease of 0.6%. This is due to the 2.6% drop in U.S. stocks after Powell's speech in 2019 and the 3.4% drop in 2022.

BNY Mellon analysts pointed out that the decline in 2019 seems to be more related to the escalation of global trade tensions rather than Powell's remarks.

But 2022 may be more firmly etched in investors' memories. Powell sent a brief and straightforward signal during this event, indicating the Fed's determination to continue raising interest rates aggressively to curb soaring inflation. He emphasized that this effort will be painful and may require economic growth to remain below trend levels for an extended period.

Now, the Fed is almost certain to start cutting interest rates. Powell stated after the Fed's July meeting that if data continues to follow recent trends, a rate cut in September is highly likely. The soft July nonfarm payrolls report and other indicators showing economic slowdown and declining inflation have strengthened this expectation, which was also confirmed by the minutes of the July policy meeting released on Thursday.

As for the Jackson Hole Central Bank Annual Symposium itself, analysts at Bank of America pointed out that the Fed Chair almost always speaks at the Jackson Hole Central Bank Annual Symposium every year. The Kansas City Fed has been hosting this event since 1982, with former Fed Chair Greenspan speaking for 14 consecutive years, which seems to have established a precedent intentionally or unintentionally.

However, the Fed Chair occasionally misses the event, with Bernanke in 2013 and Yellen in 2015 not delivering speeches.

Analysts at Bank of America noted that the Fed often downplays the importance of this event for short-term policy. After all, this is not the place for making policy decisions, and any comments by the Fed Chair on the outlook may preempt other members of the Fed's policy committee.

The analysts wrote, "Nevertheless, the Fed seems to have found a way to make this event attention-grabbing when necessary."