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The annual Jackson Hole Global Central Bank Annual Meeting will be held in Grand Teton National Park, Wyoming, USA from August 22 to 24, Eastern Time.The theme of this year's seminar is "Reassessing" the effectiveness of monetary policy and its transmission mechanism.

The market is mainly focused onFederal Reserve Chairman Powell will deliver a speech at 22:00 Beijing time on Friday (August 23).He may then hint at the next steps the Fed will take.

The Jackson Hole Annual Meeting is often considered a weathervane for the next phase of the Fed's policy direction. In the past few years, the average return of the S&P 500 index in the two weeks before and after the Jackson Hole meeting was 0.9%, with more gains than losses overall. However, Powell's speech at the meeting also caused a sharp drop in US stocks that day.

As the market awaits Powell's important speech, the minutes of the Federal Reserve's July FOMC meeting released in the early morning of August 22, Beijing time, provided some "spoiler" clues. The minutes showed that the vast majority of policymakers expected that September might be a good time to cut interest rates, and some even hoped to cut interest rates in July.

Jonathan Millar, senior U.S. economist at Barclays Bank, said in an email to the Daily Economic News reporter, "We expect Powell to paint a fairly optimistic outlook in his speech, with inflation being suppressed and the labor market gradually cooling." But he also expects Powell not to make any policy commitments.

Fed rate cut expectations remain uncertain before September meeting

As inflation continues to fall back toward the Fed's 2% target, employment growth slows, and unemployment rises, the market has fully digested the Fed's expectation of starting a new round of interest rate cuts at its meeting next month. However, how fast and how strong the rate cuts will be depends mainly on the stability of the US employment situation.

Data released by the U.S. Bureau of Labor Statistics earlier this month showed that the number of new non-farm jobs in July was far below expectations, which quickly triggered market concerns that the U.S. economy would fall into recession and caused U.S. stocks to plummet for two consecutive days. At that time, some economists began to expect the Federal Reserve to cut interest rates by 50 basis points in both the September and November meetings.

However, data such as last week's decline in inflation and strong growth in retail sales in July have largely dispelled these concerns.As of press time, traders currently expect the Federal Reserve to cut interest rates three times this year, totaling 100 basis points: 25 basis points in September, 50 basis points in November, and 25 basis points in December.

Image source: CME Group

Some officials said that if there are further signs that employment is slowing further, the probability of the Fed cutting interest rates by 50 basis points in September will increase. The August non-farm payrolls report will be released on September 6, Eastern Time.That is before the Fed's next meeting in mid-September, so traders' expectations for the Fed's policy outlook may still change further.

The reporter of Daily Economic News noticed that the minutes of the Federal Reserve's July meeting released in the early morning of Beijing time today (August 22) showed thatThe vast majority of participants believed that if data continued to meet expectations, it might be appropriate to cut interest rates in September.However, almost all participants believed that more information was needed before the rate cut to increase confidence in the decline in inflation, and some of them believed that the recent progress in inflation and the rise in unemployment even justified a rate cut in July. The minutes gave the market some expectations for Powell's speech at the Jackson Hole Annual Meeting.

“The coronavirus pandemic is a very severe economic downturn,” David Mericle, chief U.S. economist at Goldman Sachs Research, said in a recent report.Given the data released after the July FOMC meeting, we expect Powell to express more confidence in the inflation outlook (in his Jackson Hole speech) and place greater emphasis on downside risks to the job market.”

Jonathan Millar also pointed out in an email to the reporter of Daily Economic News, "We expect Powell to paint a fairly optimistic outlook in his speech, that is, inflation is suppressed, the labor market is gradually cooling down, and confirm that the FOMC will pay attention to the risks faced by each of its dual missions (note: full employment and price stability)."

Citi: Powell is less likely to signal a major easing

The Jackson Hole Annual Meeting is hosted by the Kansas City Federal Reserve and has been held annually since 1982. Its main purpose is to provide a forum for central bank governors, Federal Reserve officials and other policymakers and scholars from major economies to discuss long-term policy issues of common concern. This year's annual meeting was held against the backdrop of a turning point in the monetary policies of central banks around the world.

Looking back at history, the Jackson Hole Annual Meeting is often regarded as a weather vane for the next stage of the Fed's policy direction. Especially after the COVID-19 pandemic, the Fed's monetary policy has experienced rapid easing and aggressive tightening, and the signal of policy shift has attracted particular attention.

Since 2010, the S&P 500 has averaged a 0.9% return in the two weeks before and after the Jackson Hole conference each year, with more gains than losses overall.But the Fed chairman's remarks at the Jackson Hole symposium occasionally cause a larger reaction. For example, at the Jackson Hole symposium in August 2022, Powell's speech dashed investors' hopes for a quick end to the Fed's rate hikes, and the S&P 500 fell 3.4% that day.

The current market has high expectations for the Fed to release a signal of interest rate cuts. How much interest rate cut expectations have been factored into various assets? In terms of the degree of "preemption", CICC believes that: interest rate futures > gold > copper > US bonds > US stocks.

But Citi believes that last week's retail sales data was stronger than expected and the number of initial jobless claims was lower than expected, indicating that Powell is less likely to signal a significant easing policy at the Jackson Hole Symposium.

Jonathan Millar said: "Given the latest inflation data, we expect him to be more confident in the conditions for a 25 basis point rate cut at the September meeting, provided that inflation and the labor market remain moderate.We do not expect Powell to make any policy commitments and may reiterate that the decision will be based on the upcoming economic data.And stated that the FOMC is prepared to respond forcefully in the event of unexpected weakness in the labor market.”

In the foreign exchange market, options traders are positioning for further declines in the dollar on expectations that Powell will reinforce the case for rate cuts in his speech at Jackson Hole.

Image source: Bloomberg

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