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. As we mentioned last week when gold hit a new high, the market is fully prepared for a rate cut in a few weeks!
The theme of this year's seminar is "Re-evaluating the effectiveness and transmission mechanism of monetary policy". Fed Chairman Powell will deliver a speech at 22:00 Beijing time on Friday (August 23). The market generally expects that Powell's speech will provide important clues to the future direction of the Fed's monetary policy. What is his position on this statement? We will know at 10 o'clock tonight.
Preview of Will's speech
Tonight, the speech of Federal Reserve Chairman Powell has attracted much attention as the market is increasingly concerned about the outlook for the U.S. economy. With the weak performance of the U.S. labor market, especially the unexpected rise in the unemployment rate to 4.3%, the highest level since October 2021, and only 114,000 new jobs in July, these worrying signals have increased investors and economists' expectations for a short-term interest rate cut by the Federal Reserve.
Over the past few weeks, there has been a heated discussion in the market about whether the Federal Reserve will cut interest rates at its September meeting. With the release of the July employment report, the market generally expects that the Fed may take action to cut interest rates to address the risk of an economic slowdown. The cooling of the labor market and the inflation rate just above the Fed's 2% target further support this expectation.
However, Powell and his colleagues decided not to cut interest rates at their last meeting, a decision that was criticized by some after the data was released. Some economists worry that the Fed's delay could exacerbate labor market weakness and even push the economy to the brink of recession.
Those concerns were heightened by employment data released Wednesday by the Bureau of Labor Statistics, which showed the economy created 818,000 fewer jobs than initially reported in the 12 months ending in March 2024. As part of a revision to its initial annual benchmark for nonfarm payrolls, the BLS said actual job growth from April 2023 to the following March was nearly 30% lower than the 2.9 million initially reported.
(Source: U.S. Bureau of Labor Statistics)
Wall Street has been watching the data closely, with many economists expecting a sharp drop in the initial reading. The report could be seen as a sign that the labor market is not as strong as previous Bureau of Labor Statistics reports have suggested.
Against this backdrop, Powell's speech tonight is particularly important. The market had earlier expected that the Fed might cut interest rates by 50 basis points at its September meeting in response to worsening economic conditions. However, in recent weeks, with the improvement in US stock market sentiment, the decline in US Treasury yields, and the fact that the overall US economy has not yet completely deteriorated, market expectations have changed. Investors now generally believe that the Fed may not take such aggressive action, but is more likely to choose to cut interest rates by 25 basis points if necessary.
Powell may remain cautious in his speech tonight and try to avoid giving the market excessive policy expectations. He may reiterate the Fed's position that it will continue to rely on data in its decision-making process and adjust policies according to the development of the economic situation. He may point out that although there are some signs of weakness in the labor market, the Fed still needs more time and data to fully assess the economic situation and ensure that the policy measures taken are appropriate.
In addition, Powell may mention that the Fed's primary goal remains to maintain stable economic growth and ensure that inflation remains near the 2% target. Even if the labor market cools, he may also emphasize that the current inflation level is slightly above the target, which means that great caution is needed before taking major interest rate cuts. If Powell's focus tonight is more on the labor market than inflation, it can be considered a "dovish speech."
Overall, Powell is likely to avoid committing to immediate, large-scale policy adjustments and instead focus on the Fed's reliance on future economic data and policy flexibility. After all, there is still a round of non-farm and inflation data to be released before the next Fed meeting.
Jackson Hole speech is no joke
As the Fed's annual economic policy seminar, the Jackson Hole Conference has always been regarded as an important window to observe the Fed's policy direction. For the Fed, Jackson Hole is not only a place to convey policy intentions, but also a key opportunity to shape market expectations. In the past few years, many Fed chairmen have made important speeches at this conference, which not only affected the market trend at the time, but also profoundly shaped the importance 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 about to end, although Powell still left the possibility of further rate hikes in his speech. The stock market rebounded that day, and this market interpretation was ultimately proven to be correct, as the Fed has indeed not raised interest rates since July 2022.
Jackson Hole is not only an occasion for Fed chairmen to send policy signals, but also a platform for them to foresee and respond to economic changes. In 2010, then-Fed Chairman Ben Bernanke used the Jackson Hole meeting to hint at further monetary easing measures. At the time, the US economy was slowly recovering from the Great Recession, and Bernanke mentioned in his speech 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, QE2 , to lower interest rates by purchasing long-term Treasury bonds, injecting momentum into the economic recovery after the financial crisis.
This is not an isolated case. In 2012, Bernanke again expressed his concerns about the stagnation of the labor market at the Jackson Hole Conference, stating that this was a "serious problem." Although Bernanke's speech caused the market to fall in the early stages, the market rebounded, and soon after, the Federal Reserve launched the third round of quantitative easing (QE3) .
Similarly, in 2016, Janet Yellen, then-chair of the Federal Reserve, said at the Jackson Hole conference that she believed that "the case for raising the federal funds rate has strengthened," foreshadowing the upcoming rate hike cycle for the market . Sure enough, starting in December 2016, the Fed began a new round of rate hikes, and until 2018, it raised rates every three meetings. 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 can not only reflect the current economic situation, but also affect the economic trend in the coming months or even years. Through Jackson Hole, the Fed can test the market's reaction to its policies before the September policy meeting, thereby reducing uncertainty.
This expectation management effect helps the Federal Reserve to adjust policies more effectively and reduce excessive market volatility when faced with a complex economic environment. Therefore, the importance of Jackson Hole has been widely recognized and highly valued in the global financial market.
Highlights from the latest meeting minutes
The minutes of the Federal Reserve's July FOMC meeting released in the early morning of August 22 Beijing time showed that the vast majority of policymakers expected that September might be a suitable time for a rate cut, and several officials even advocated an immediate reduction in borrowing costs.
At the July 30-31 meeting, a clear majority of participants said it would be appropriate to ease policy at the next meeting if data continued to be in line with expectations, the minutes said.
Markets have fully priced in a September rate cut, which would be the first since emergency easing in early 2020.
( Source: Federal Reserve Bank of St. Louis )
While all officials on the rate-setting Federal Open Market Committee voted to keep the benchmark rate unchanged, some preferred to start easing policy at the July meeting rather than waiting until September.
"Several participants noted that recent changes in the pace of inflation and unemployment provided a reasonable basis for lowering the target range by 25 basis points at this meeting or that they could have supported such a decision, " the official document said.
The Fed used language in the minutes, which did not mention names or specify how many policymakers felt that way, that “several” was a relatively small number.
However, the minutes made clear that officials are confident about the direction of inflation and are prepared to start easing monetary policy if the data continue to cooperate.
Stephanie Long, chief investment officer at Homrich Berg, stressed that Powell's words are crucial. Options traders are currently pricing in a more than 1% move in either direction for the S&P 500 on Friday, according to Citigroup.
"While it may be too early to declare victory, something the Fed will be careful to avoid in its official rhetoric, the inflation fears that have dominated the policy debate since prices surged during the pandemic are now largely gone," Barclays economist Christian Keller wrote in a note. "Inflation may not yet be at target, but it is close and heading in the right direction."
Jonathan Millar, senior U.S. economist at Barclays, said, "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.
US PMI in August falls short of expectations
On the evening of August 22nd, Beijing time, data released by S&P Global showed that the initial value of the S&P Global Manufacturing PMI in the United States in August was 48, the lowest in 8 months, with an expected value of 49.6 and a final value of 49.6 in July.
The initial value of the S&P Global Services PMI in the United States in August was 55.2, expected to be 54, and the final value in July was 55.
The initial value of the S&P Global Composite PMI in the United States in August was 54.1, expected to be 53.5, and the final value in July was 54.3.
( Source: S&P Global PMI )
From the Fed's perspective, the latest PMI data reinforces the need for rate cuts.
"Overall, inflation is continuing to slowly return to more normal levels and the economy faces risks of slowing amid imbalances," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Global central bank trends
In addition to the Fed, the dynamics of other major central banks are also worth paying attention to. 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 of various countries can find a balance between supporting economic growth and controlling inflation will also be one of the focuses of discussion at this annual meeting.
In addition, many central banks in Asia will also hold interest rate meetings. Among them, the Bank of Korea has recently decided to maintain its policy unchanged, while the central banks of Thailand and Indonesia may announce interest rate cuts to cope with the pressure of continued price declines and slowing economic growth.
The Bank of Japan's speech earlier this month added to turmoil in global markets, and markets will be closely watching a speech by Bank of Japan Governor Kazuo Ueda to lawmakers on Friday .
Performance of US stocks during global central bank annual meetings in recent years
At the Jackson Hole Global Central Bank Annual Meeting over the years, the speeches of Federal Reserve Chairman Powell have caused fluctuations in the U.S. stock market. Wind data shows that in the past five years of the central bank annual meeting, the U.S. stock market did not rise much on the day when Powell spoke, but it basically fell sharply when it fell. In 2019 and 2022, Powell's speeches scared the U.S. stock market, and the three major stock indexes plummeted by more than 2% and more than 3% respectively on the same day. The market was also turbulent in 2023. Although it rose slightly on the day, the day before Powell's speech, the Dow Jones Industrial Average recorded its largest point drop in five months, and the Nasdaq fell nearly 2%.
