Learning from history! Will the Jackson Hole Federal Reserve annual meeting actually trigger a major market rally?

If there is one thing that bond and stock investors in the United States most want Powell to say at Jackson Hole on Friday, it is probably this: he will adopt a cautious strategy.

For the Fed chairman, this is a critical moment. Earlier, the market was extremely volatile. The indicator measuring stock volatility soared to the highest level in a generation, while bond traders were betting heavily on a Fed rate cut.

According to some metrics, this annual policy maker and scholar conference held in Wyoming is expected to be a calm one. Strategists from JP Morgan and Deutsche Bank expect that there will be moderate volatility in the bond market during the meeting, while options traders are betting on minor stock market fluctuations in the coming days. Recent history is on their side. Blake Gwinn, head of U.S. rate strategy at RBC Capital Markets, stated:

"The current state of the Fed is completely acceptable, and I don't think Powell needs to stir up waves here."

With a few exceptions, this meeting is not a major market-moving event. Data compiled by foreign media shows that over the past decade, the 2-year and 10-year U.S. Treasury yields have averaged less than a 4 basis point change during this meeting. The S&P 500 index, on the other hand, has shown a more pronounced reaction, with an average fluctuation of about 1.3%.

In a note on August 16, JP Morgan strategists wrote, "Traditionally, the Fed chairman's speech at the Jackson Hole central bank symposium does not lead to significant fluctuations in U.S. Treasury yields, and given the importance of the upcoming August employment report, Powell is unlikely to provide too many details on the extent or pace of rate cuts."

However, shocks are not impossible. In recent years, the Jackson Hole central bank symposium has become a place where central bank governors sometimes announce major policy measures. For example, former ECB President Draghi laid the groundwork for quantitative easing at the 2014 symposium.

Two years ago, Powell delivered a hawkish speech in Wyoming, warning investors that fighting inflation would bring "pain" to households and businesses, surprising the market. On that day, the S&P 500 index fell by 3.4%, and the 10-year Treasury yield fluctuated by 8 basis points during the day. As traders raised expectations for more rate hikes by the Fed, the market continued to sell off in the following weeks.

Earlier this month, a surprise increase in the unemployment rate and a reversal of arbitrage trades shook the financial markets, triggering bets on an emergency rate cut by the Fed and sending Wall Street's fear index VIX to its highest level outside of the global financial crisis and the COVID-19 outbreak. These bets have since weakened.

Currently, volatility seems to be subsiding. With Powell possibly hinting that tight monetary policy is no longer necessary, options traders are preparing for a 6 basis point fluctuation in the 10-year Treasury yield. This is insignificant compared to the 19 basis point drop in Treasury yields following the release of the non-farm payroll report on August 2, which showed the unemployment rate rising to its highest level in nearly three years Deutsche Bank's strategist analyzed the historical data of the Jackson Hole Federal Reserve annual meeting, estimating that the 10-year US Treasury yield would fluctuate by about 5 basis points on that day.

According to Citigroup, traders are preparing for a 0.9% volatility in the S&P 500 index for stocks, based on the cost calculation of at-the-money call and put options. This is slightly lower than the level of over 1% a week ago.

Powell's colleagues are increasingly sounding dovish, believing that it is time to start cutting interest rates. With the next non-farm payroll report set to be released less than two weeks before the September policy meeting, the interest rate market fully believes that the Fed will cut rates by 25 basis points in September, with about a 20% chance of a 50 basis point cut.

For the full year 2024, traders are betting that the Fed will cut rates by nearly 100 basis points, lower than the nearly 150 basis points earlier this month. John Queen, portfolio manager at Capital Group managing $2.5 trillion in assets, stated:

"The market pricing is quite reasonable, the Fed has been very successful in guiding the economy on the right track, economic growth is slowing down, but not collapsing."