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The Fed's annual event, the Jackson Hole Annual Meeting, is underway, with this year's theme being "Reassessing the Effectiveness and Transmission of Monetary Policy". Fed Chairman Powell will deliver a speech on the outlook for the U.S. economy at the meeting at 22:00 Beijing time on August 23. As the Fed Chairman has released key policy signals at previous Jackson Hole Annual Meetings, investors are paying close attention to his speech tonight.

Market analysts believe that Powell’s speech tonight will have three key points.First, we must stand firm, regain control of expectations for a September rate cut, and clarify the factors that affect the speed and magnitude of subsequent rate cuts; second, in light of the theme of this meeting, summarize the lessons learned from the past few years in responding to the epidemic and the resulting high inflation; third, look to the future and lay the foundation for the assessment of the monetary policy framework to be completed in 2025.

About the Jackson Hole Conference

Every year at the end of August, the Kansas Fed holds an academic seminar at Jackson Lake Lodge in Grand Teton National Park, Wyoming, which the market calls the "Jackson Hole Annual Meeting." This year's meeting started on Thursday local time and lasted until Saturday.

To the uninitiated, it might seem odd that the world’s most important annual central bank conference would be held in the relatively remote state of Wyoming, two time zones away from the Federal Reserve’s headquarters in Washington and more than 1,000 miles from the offices of the organizer, the Federal Reserve Bank of Kansas City. But this academic symposium is no ordinary conference.The participants are monetary policy makers, academics and financial journalists, but here they put on cowboy boots and discuss the latest economic papers while enjoying local huckleberry cakes.

As for why it was held in Wyoming,Part of the reason is that the environment here is very suitable for fly fishing.The Kansas City Fed held its first annual meeting in 1978, but the original location was not here. In the early 1980s, organizers began looking for a new location.Conference organizers hoped that then-Federal Reserve Chairman Volcker would be able to attend the event.He loves fishing, and there are streams near Jackson Lake Lodge that are very suitable for fishing. With the beautiful Rocky Mountain background and the presence of Mr. Volcker, Jackson Hole soon became the annual event venue of the Federal Reserve. The Federal Reserve System divides the United States into 12 regions, and the Grand Teton National Park here is under the jurisdiction of the Federal Reserve of Kansas City.

Former Fed Chairman Alan Greenspan spoke at the Jackson Hole symposium in 1989, starting a trend of Fed chairmen attending the event and making it the center of market attention. Even if Jackson Hole's importance and location are a bit incongruous, it does not prevent it from being the most important Fed event of the year. The meeting is invitation-only, and the number of guests at the event remains limited to this day:In recent years, the average attendance has been 115 to 120 people.Here they present key monetary policy and economics research results,and announce or hint at major policy shifts.

This event has long been the focus of Wall Street. This year is no exception. Federal Reserve Chairman Powell is scheduled to deliver a speech on Friday evening Beijing time.Markets are anxiously waiting to parse his comments, looking for clues about how much the Fed will cut interest rates next month.

What will Powell say this year?

The Jackson Hole symposium has become even more important in the 21st century, in part because the Fed chairman often makes major policy statements at the event.

In 2020, Fed Chairman Powell used the meeting to launch the Fed's new monetary policy strategy. In 2021, he explained why a new round of inflation might subside on its own, which is the famous "inflation is only temporary" statement. In 2022, he switched to promising to fight inflation by raising interest rates. In 2023, he pointed out at the Jackson Hole Annual Meeting that subsequent interest rate hikes need to be cautious.

This year, the market is focusing on:Whether he will release information about the timing and magnitude of the first interest rate cut, as well as the path of subsequent interest rate cuts.So far, the U.S. economy has held up well despite steadily falling inflation.Economists expect Powell to signal that the Fed may begin cutting interest rates at its September meeting.

However, economists also believe thatThe Fed chairman will likely avoid being too specific. After all, there is a key nonfarm payrolls report coming before the Fed's September meeting.Powell, who doesn’t want to make too many promises at a moment when the outlook could change, may not be able to answer Wall Street’s biggest question: How fast will interest rates fall? Traders are betting the Fed is likely to cut rates by a quarter percentage point in September, while some expect a bigger cut, especially because the job market is slowing after the unemployment rate jumped to 4.3% in July, a worrying sign that has officials worried the job market could be on the verge of collapse.

Jan Hatzius, chief economist at Goldman Sachs, said:“He’s going to say something that’s clearly consistent with a rate cut ... but I don’t think he’s going to lock in the size of the cut.”

In any case, Powell's remarks and the Fed's subsequent actions will determine whether the US economy declines moderately or makes a painful crash landing, and the market faces two major risks.

If the Fed cuts rates sharply to prevent an excessive slowdown, it would lower borrowing costs across the economy, which could allow demand to pick up. While that would be a welcome development for businesses and potential homebuyers, it could lead to a return of high inflation if it's not already fully under control. But if it moves too slowly to cut rates, the job market could slow so much that households pull back on spending and the economy falls into recession -- a so-called hard landing.

The Elephant in the Room: Politics and the Election

Politicians care a lot about what the Fed does — especially in an election year, when no president wants to accept an economy that's in recession. Incumbents generally prefer low interest rates because they're good for markets and the economy.

However, the White House has no direct control over Fed policy. The president of the United States can nominate the seven members of the Fed's board of governors, including the Fed chairman, but the nominations must be confirmed by the Senate. Once in office, Fed officials are free from political influence and are free to set policies as they see fit.

However, this does not prevent government officials from "dictating" to the Fed. Republican candidate and former President Trump talked about the Fed many times during the campaign this year, explicitly or implicitly saying that if the Fed cuts interest rates before the election, it will be political, and once said that the president should have a "say" on interest rates and monetary policy. Fed officials including Powell said that they do not consider politics and the presidential election when considering interest rates.

"They just won't be dragged into the mud," said Julia Coronado, a former Federal Reserve economist and founder of research firm MacroPolicy Perspectives. In addition, the impact of the September rate cut on the market or the economy may not be enough to influence the outcome of the US election. "I don't think the presidential election will be won or lost by lowering or raising interest rates," she added.

Market reaction

Wall Street is betting that Powell will confirm a September rate cut tonight. But as the debate shifts from “will there be a rate cut” to “how big a cut,” stock traders may be left with expectations that won’t be met.

“If traders hear that a rate cut is coming, the stock market will react favorably,” said Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory. “If we don’t hear what we want, that’s going to cause a sell-off.”

Nicholas Colas, co-founder of DataTrek, said: "The S&P 500 (SPX) tends to rebound in the two weeks before and after the Fed's Jackson Hole meeting, mainly after the Fed chairman's speech. We expect the same to happen this year." He said that the market's expectations for the Fed to cut interest rates later this year are very high.Powell's comments on this issue on Friday should give the market enough confidence to see a typical Jackson Hole-triggered rally in the next two weeks.。

In the foreign exchange market, options traders are currently betting that the dollar will fall further as Powell is expected to strengthen the case for rate cuts at the Jackson Hole central bank annual meeting. However, investors also need to be wary of risks in the other direction.

Macquarie analysts recently wrote that Fed Chairman Powell is expected to strike a dovish tone when he speaks at the Jackson Hole Economic Symposium.But it is unlikely to be overly dovish.Powell's tone, as well as upcoming data and political developments, could influence the direction of the dollar in the coming weeks.

The euro has enjoyed a strong August rally, reaching a one-year high against the dollar on Wednesday, but cautious comments from Federal Reserve Chairman Jerome Powell on Friday could reverse that momentum. The euro has long been the easiest way for market participants to bet against the U.S. economy because sellers can easily find buyers and vice versa.

As global central bankers convene in Jackson Hole and European economic growth remains sluggish,Many fear that the euro's fortunes are about to turn.Strategists say that if Powell pushes back against market expectations for rate cuts, U.S. interest rates will remain high relative to Europe, which has already begun cutting rates, thereby increasing the appeal of the dollar.