Breaking news! The Federal Reserve Chairman is about to speak

Eastern Time from August 22 to 24, the annual Jackson Hole Global Central Bank Conference will be held at Grand Teton National Park in Wyoming, USA. As we discussed last week when gold hit a new high, the market has been well-prepared for interest rate cuts in the coming weeks!

This year's seminar is themed "Reassessing the Effectiveness and Transmission Mechanisms of Monetary Policy." Federal Reserve Chairman Jerome Powell will deliver a speech at 10 PM Beijing time on Friday (August 23), and the market widely expects that Powell's remarks will provide important clues about the future direction of the Fed's monetary policy. What will his stance be in this discussion? We will know tonight at 10 PM.

Preview of Powell's Speech

Tonight, Federal Reserve Chairman Powell's speech is highly anticipated, as concerns about the U.S. economic outlook are growing. With the U.S. labor market showing signs of weakness, particularly with the unemployment rate unexpectedly rising to 4.3%, the highest level since October 2021, and only 114,000 jobs added in July, these worrying signals have led investors and economists to increase expectations for a short-term interest rate cut by the Fed.

In recent weeks, there has been intense discussion in the market about whether the Fed will cut rates at the September meeting. Following the release of the July employment report, the market generally expects that the Fed may take action to cut rates in response to the risks of an economic slowdown. The cooling labor market and inflation rates slightly above the Fed's 2% target further support this expectation.

However, Powell and his colleagues decided not to cut rates at the last meeting, a decision that faced criticism from some after the data was released. Some economists are concerned that the Fed's delay could exacerbate the weakness in the labor market and even push the economy to the brink of recession.

The employment data released by the U.S. Bureau of Labor Statistics on Wednesday has intensified these concerns. In the 12 months ending March 2024, the number of jobs created by the U.S. economy was revised down by 818,000 from the initial report. As part of the preliminary annual benchmark revision of non-farm payroll data, the Bureau of Labor Statistics stated that actual job growth from April 2023 to March of the following year was nearly 30% lower than the initially reported 2.9 million.

Source: U.S. Bureau of Labor Statistics

Wall Street has been closely monitoring this data, with many economists expecting the initially reported figures to be significantly revised down. The report may be seen as a sign that the labor market is not as strong as previously indicated by the Bureau of Labor Statistics.

In this context, Powell's speech tonight is particularly important. Earlier, the market expected the Fed to cut rates by 50 basis points at the September meeting to address the deteriorating economic conditions. However, in recent weeks, as sentiment in the U.S. stock market has improved, U.S. Treasury yields have declined, and the overall U.S. economy has not fully deteriorated, market expectations have changed. Investors now generally believe that the Fed may not take such aggressive action but is more likely to opt for a 25 basis point cut if necessary.

Powell may choose to remain cautious in his speech tonight, trying to avoid creating excessive policy expectations in the market. He may reiterate the Fed's position that it will continue to rely on data in its decision-making process and adjust policies based on the evolving economic situation. He may point out that, despite some signs of weakness in the labor market, the Fed still needs more time and data to fully assess the economic situation to ensure that the policy measures taken are appropriate.

Additionally, Powell may mention that the Fed's primary goal remains to maintain stable economic growth and ensure that inflation stays near the 2% target. Even if the labor market shows signs of cooling, he may emphasize that the current inflation level, slightly above the target, means that caution is needed before taking significant rate cuts. If Powell's focus tonight leans more towards the labor market rather than inflation, it could be interpreted as a "dovish speech."

Overall, Powell is likely to avoid committing to immediate large-scale policy adjustments, instead focusing on the Fed's reliance on future economic data and the flexibility of its policies, especially with another round of non-farm payroll and inflation data to be released before the next Fed meeting.

Jackson Hole Speeches Are Never a Joke

The Jackson Hole Conference, as the Federal Reserve's annual economic policy seminar, has always been seen as an important window for observing the direction of Fed policy. For the Fed, Jackson Hole is not only a venue for conveying policy intentions but also a critical moment for shaping market expectations. In recent years, several important speeches by Fed chairs at this conference have not only influenced market trends at the time but have also profoundly shaped the significance of the policy framework released by the Fed on this platform.

For example, Powell's speech at Jackson Hole in 2023 was interpreted by the market as a signal that the Fed's rate hike cycle was nearing its end, even though Powell still retained the possibility of further rate hikes in his remarks. On that day, the stock market rebounded, and this market interpretation was ultimately proven correct, as the Fed indeed did not raise rates again since July 2022.

Jackson Hole is not only a venue for the Fed chair to signal policy but also a platform for them to foresee and respond to economic changes. In 2010, then-Fed Chairman Bernanke used the Jackson Hole conference to hint at further monetary easing measures. At that time, the U.S. economy was slowly recovering from the Great Recession, and Bernanke mentioned that the Fed had "policy options to provide additional stimulus," which brought new expectations to the market. A few months later, he announced a new round of bond purchases, known as QE2, to lower interest rates and boost the economy's recovery after the financial crisis.

Such examples are not isolated. In 2012, Bernanke again expressed concerns about the stagnation in the labor market during the Jackson Hole conference, calling it a "serious problem." Although Bernanke's remarks initially led to a market decline, the market rebounded shortly thereafter, and not long after, the Fed indeed launched the third round of quantitative easing (QE3).

Similarly, in 2016, then-Fed Chair Janet Yellen stated at the Jackson Hole conference that she believed "the case for raising the federal funds rate has strengthened," signaling to the market the impending rate hike cycle. Indeed, starting in December 2016, the Fed began a new round of rate hikes, raising rates once every three meetings until 2018. This further highlights the importance of the Jackson Hole conference in guiding market expectations and adjusting the policy framework.

Through this platform, the Fed can adjust its policies in the context of the global economy and influence market expectations through carefully crafted statements. The market's interpretation of these signals not only reflects the current economic situation but can also impact economic trends for months or even years to come. Through Jackson Hole, the Fed can test the market's reaction to its policies ahead of the September policy meeting, thereby reducing uncertainty.

The role of this expectation management helps the Fed to adjust its policies more effectively in the face of a complex economic environment, reducing excessive market volatility, and thus the importance of Jackson Hole has been widely recognized and highly valued in global financial markets.

Key Points from the Latest Meeting Minutes

The minutes from the Fed's July FOMC meeting, released in the early hours of August 22 Beijing time, show that the vast majority of decision-makers believe that a rate cut may be appropriate in September, with several officials advocating for an immediate reduction in borrowing costs.

At the meeting held on July 30-31, the vast majority of participants felt that if the data continued to align with expectations, it would be appropriate to ease policy at the next meeting, according to the minutes.

The market has fully priced in a rate cut in September, which would be the first since the emergency easing measures in early 2020.

Source: Federal Reserve Bank of St. Louis

Although all officials of the Federal Open Market Committee voted to maintain the benchmark rate, some officials leaned towards starting to ease policy at the July meeting rather than waiting until September.

The official document states, "Several meeting participants noted that recent changes in inflation and rising unemployment rates provided a reasonable justification for lowering the target range by 25 basis points at this meeting, or they could have supported such a decision."

The term "several" used in the minutes is a relatively small number. The minutes did not mention names or specify how many policymakers felt this way.

However, the minutes clearly indicate that officials are confident about the direction of inflation and are prepared to begin easing monetary policy if the data continues to cooperate.

Stephanie Lang, Chief Investment Officer at Homrich Berg, emphasized that Powell's wording is crucial. Citigroup data shows that options traders currently expect the S&P 500 index to fluctuate by more than 1% on Friday.

Barclays economist Christian Keller wrote in a report, "Although it may be too early to declare victory, the Fed will cautiously avoid such language in its official statements, but the inflation panic that has dominated policy debates since prices surged during the pandemic has now largely dissipated. Inflation may not yet be at target, but it is close and moving in the right direction."

Barclays Senior U.S. Economist Jonathan Millar noted, "We expect Powell to paint a fairly optimistic picture in his speech, indicating that inflation is being contained and the labor market is gradually cooling." However, he also expects Powell not to make any policy commitments.

U.S. August PMI Below Expectations

On the evening of August 22 Beijing time, S&P Global released data showing that the U.S. August S&P Global Manufacturing PMI preliminary value was 48, the lowest in eight months, with an expectation of 49.6 and a final value of 49.6 in July.

The U.S. August S&P Global Services PMI preliminary value was 55.2, with an expectation of 54 and a final value of 55 in July.

The U.S. August S&P Global Composite PMI preliminary value was 54.1, with an expectation of 53.5 and a final value of 54.3.

Source: S&P Global PMI

From the Fed's perspective, the latest PMI data reinforces the necessity for a rate cut.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated, "Overall, inflation is continuing to slowly return to normal levels, and the economy faces risks of slowing amid imbalances."

Global Central Bank Movements

In addition to the Fed, the dynamics of other major central banks are also worth noting. Bank of England Governor Bailey and European Central Bank Chief Economist Philip Lane will also speak at the annual meeting. Against the backdrop of a global economic slowdown, how central banks around the world find a balance between supporting economic growth and controlling inflation will be one of the focal points of this year's conference.

Additionally, several Asian central banks will hold monetary policy meetings. Among them, the Bank of Korea recently decided to maintain its policy stance, while the central banks of Thailand and Indonesia may announce rate cuts to address the pressures of falling prices and slowing economic growth.

The recent remarks from the Bank of Japan have heightened global market volatility, and the market will closely watch Bank of Japan Governor Kazuo Ueda's speech to lawmakers on Friday.

Recent U.S. Stock Market Performance During Global Central Bank Meetings

In recent years, speeches by Fed Chair Powell at the Jackson Hole Global Central Bank Conference have caused fluctuations in the U.S. stock market. Data from Wind shows that in the last five years during the central bank conference, when Powell spoke, the stock market's gains were modest, but declines were generally significant. In 2019 and 2022, Powell's speeches caused sharp declines in the stock market, with the three major indices dropping more than 2% and 3%, respectively, on those days. The market also experienced notable fluctuations in 2023; although it rose slightly on the day of Powell's speech, the day before, the Dow Jones Industrial Average recorded its largest point drop in five months, with the Nasdaq falling nearly 2%.