While Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole global central bank symposium on Friday will attract much attention, the chances of it containing any surprising news seem slim.

The market has almost confirmed that the Fed will begin cutting interest rates in September and will likely continue to do so through the end of this year and into 2025. While some questions remain about the magnitude and frequency of rate cuts, Powell can now only provide a brief review of the past and some limited guidance on what will happen in the future.

Lou Crandall, a former Fed official and current chief economist at Wrightson-ICAP, expects Powell to repeat his old tune, emphasizing that "they are still data dependent." He expects Powell to "be unequivocal in the direction, but the exact pace and timing of rate cuts will depend on the data between now and the September meeting. There is no doubt that they will start cutting rates in September."

Powell's speech will be delivered at the Fed's annual global central bank governors' meeting in Jackson Hole, Wyoming, at 10 pm Beijing time. The theme of the meeting is "Reassessing the Effectiveness and Transmission of Monetary Policy" and the meeting will last until Saturday.

If there were any doubts about the Fed’s intention to cut interest rates by at least a quarter point at the September 17-18 Federal Open Market Committee (FOMC) meeting, they were dispelled on Wednesday when the minutes of the July meeting showed that a “majority” of members favored a September rate cut, barring any surprises.

This was further demonstrated when Philadelphia Fed President Patrick Harker told CNBC on Thursday that “in September, we need to start the process of cutting rates.”

Providing guidance to the market

A major question is whether the Fed's first rate cut in more than four years will be a quarter point or a half point, and Harker would not say whether it would be a quarter point cut. The market is betting on a quarter point cut, but there is also a one in four chance of a half point cut, according to CME Group's FedWatch tool.

The latter would likely require a sharp deterioration in economic data between now and then, particularly the nonfarm payrolls report in two weeks’ time.

“While I think the Fed’s base case is for a 25 basis point rate cut, which is consistent with my base case, I don’t think they’ll feel the need to provide any guidance that’s too far into the future,” Crandall said.

In previous years, Powell has used his Jackson Hole speech to outline broad policy initiatives and provide clues about future policy.

In his 2018 debut, he outlined his views on what would be considered “neutral,” or stable, interest rates and unemployment. A year later, he said a rate cut was coming.

In 2020, Powell spoke during racial protests and unveiled a new policy framework that allowed inflation to run higher than usual without raising interest rates to promote a more inclusive job market. However, this "flexible average inflation target" later led to a period of soaring prices, causing Powell to navigate a delicate policy minefield in the following three years.

This time around, his task will be to confirm market expectations while also signaling his views on the economy, particularly easing inflation pressures and some concerns about the labor market.

“The key for us will be Powell’s tone, which we expect to be dovish” or leaning toward lower rates, Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions, said in written comments. “In short, inflation continues to trend toward the 2% target and appears to be slowing faster than consensus. Combined with signs that the labor market is softening, there is little need to remain hawkish.”

Listen to the market

The Fed has kept its key overnight lending rate unchanged for the past 13 months. Markets have mostly held up well under the higher rate regime, but there was a brief jolt after the July meeting amid signs of deteriorating labor conditions and weakness in manufacturing, and Powell is expected to give at least a nod to some economic headwinds and the Fed’s progress in fighting inflation.

“We expect Powell to express more confidence in the inflation outlook and emphasize downside risks to the labor market more than he did in his press conference following the July FOMC meeting,” Goldman Sachs economist David Mericle said in a recent note.

Goldman Sachs' expectations for the Fed's interest rate outlook are basically consistent with the market: the Fed is expected to cut interest rates at each of the next three meetings, and then increase easing efforts, eventually cutting the federal funds rate by about 200 basis points. The bank believes that Powell will give a very general preview of this policy path at the Jackson Hole meeting.

Powell claims to be unresponsive to moves in financial markets, but he undoubtedly saw the market reaction after the July meeting and wants to allay concerns that the Fed will continue to wait.

“Powell tends to be pro-stock,” said Komal Sr-Kumar, head of Sri-Kumar Global Strategies. “He’s said time and again that rates will come down, but he hasn’t done it, but this time he’s really going to cut rates.”

The article is forwarded from: Jinshi Data