What to Expect From Federal Reserve Chair Powell’s Jackson Hole Speech Friday?

Stocks slipped on Thursday as Wall Street waited to hear what Federal Reserve Chair Jerome Powell would say at the Fed’s annual Jackson Hole Economic Policy Symposium, which this year comes at a critical turning point for the central bank. 

Powell is scheduled to speak Friday morning, less than a month before the Fed enters a policy meeting at which it is expected to lower interest rates for the first time in more than four years.

Wall Street is all but certain the Fed will cut rates in September, and has recently upped its rate cut expectations in response to signs of a slowing economy and a shift in Fed officials’ tone. 

As of Thursday, markets anticipate the Fed will cut rates by about 100 basis points (bps), or 1 percentage point, by the end of the year, according to federal funds rate futures trading data. With only three meetings left in the year, that implies at least one cut of 50bps, a likelihood officials have largely dismissed. 

Minneapolis Fed President Neel Kashkari said in an interview with the Wall Street Journal on Monday that he didn’t see any reason to lower rates by more than 25bps at any meeting this year, given the relative stability of layoffs and unemployment claims.

Powell Unlikely to Provide Details on Rate Cut Path

Powell, who has repeatedly emphasized the need for the Fed’s decisions to be “data dependent,” is unlikely to offer any forecast of the timing and speed of interest rate cuts.

“He’s not going to lock himself in” to any policy path, said Quincy Krosby, Chief Global Strategist at LPL Financial. 

The Fed finds itself walking the tightrope of keeping inflation on a downward trajectory without allowing the labor market to break under the pressure of tight monetary policy. Officials have, in recent commentary, acknowledged they’re becoming equally concerned about both components of their dual mandate. 

The labor market has become a focal point for Fed watchers ever since data earlier this month showed the unemployment rate rose from 4.1% to 4.3% in July, a jump that surprised most economists. The jobs data led some to wonder whether the Fed had put itself behind the curve when it left rates unchanged just days before the report. 

Fed Officials Have Said September Cut Possible

The Fed elected at its July meeting to leave the benchmark fed funds rate at a 23-year high, where it has been for a year. Though minutes from that meeting, published on Wednesday, revealed officials have taken a more dovish tone. 

“Several” policymakers noted that progress on inflation and an uptick in the unemployment rate “had provided a plausible case” for cutting rates at the July meeting. 

Though the committee members were ultimately unanimous in their decision to leave rates unchanged, “the vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

Labor Market Weakness Increasingly In Focus

While several economists have noted that July’s jobs report may not be the harbinger of doom it appeared to be, the labor market will likely continue to be a wild card that could shake up financial markets. 

If there is any change in “what [Powell] telegraphs that differs from what we saw in the minutes, what we’ve been hearing, what we’ve been seeing from the data, that will be extremely important for the market,” said Krosby. “Especially if anything suggests that the Fed perhaps is more worried about the labor market.”

However, Krosby pointed out, markets are attuned to both the risk of inflation sticking and the Fed’s interest in preventing that outcome. 

“They’re always on guard about inflation, particularly this Fed,” Krosby said. “They don’t want a repeat of the failure of the monetary policy in the late 70s and early 80s, which was a stop and go, stop and go, policy that actually allowed stagflation to become entrenched.”