Next week, the entire market will be focused on one place: Jackson Hole

From the 21st to the 23rd of next week, global investors will focus on Jackson Hole, a mountain resort in Wyoming, USA. Here, Federal Reserve Chairman Jerome Powell's speech will not only provide key clues for the future path of U.S. monetary policy but may also become a defining moment in his career, defending the independence of the Federal Reserve.

The market is holding its breath. Investors generally expect the Federal Reserve to cut interest rates in the coming weeks, a sentiment that has driven the stock market, particularly interest rate-sensitive sectors, to historic highs. Any signals contrary to this expectation could trigger severe market turbulence. Powell's speech will be one of the most closely watched central bank events of the year, as he needs to reassure the market while providing solid economic justification for the Fed's decisions.

Behind the speech lies immense political pressure. The Trump administration's criticism of Powell for failing to cut rates has intensified, and potential replacements are even being considered. This places Powell's every public statement under the spotlight, and the Jackson Hole conference is the best stage for him to clarify his position and emphasize central bank independence.

Powell faces a tricky economic dilemma. On one hand, the Trump administration's tariff policies are driving up inflation, complicating the decision to cut rates; on the other hand, there are signs of a cooling labor market, and the risk of economic growth slowing cannot be ignored. Amid conflicting economic signals and ongoing political interference, every step Powell takes is like walking on thin ice.

The Risk of Unexpected Hawkishness

Wall Street is already prepared for a rate cut. Data from the federal funds futures market shows that the market believes there is over a 92% probability that the Federal Reserve will cut rates by 25 basis points at the September meeting, and expects at least one more rate cut this year.

This dovish expectation has translated into actual market actions. Interest rate-sensitive sectors have become recent big winners. Leading homebuilders such as PulteGroup, Lennar, and D.R. Horton have seen their stock prices rise between 4.2% and 8.8% over the past week, far exceeding the S&P 500 index's 1% increase. Andrew Slimmon from Morgan Stanley Investment Management stated:

“This is all about homebuilders, cyclical stocks, industrials, and materials companies.”

However, these gains have also made the market exceptionally fragile. Slimmon added that the strong rebound of homebuilders indicates that the market firmly believes the Federal Reserve will cut rates, so “any signals from Jackson Hole suggesting otherwise will make the market more susceptible to sell-offs.” IBKR market strategist Steven Sosnick also warned:

“What if people are expecting a dovish Powell, but he comes out strongly hawkish? The more complacent we feel going into this meeting, the greater the risk of market volatility in response.”

Difficult Choices Under Political Pressure

Powell's cautious stance sharply contrasts with the urgency of the Trump administration. President Trump has not only publicly called Powell a "stubborn fool," accusing him of being "too late," but has also hinted at the possibility of firing him before his term ends. The White House is already screening potential replacements, focusing on candidates willing to cut rates quickly This political interference makes the Federal Reserve's decision-making exceptionally difficult. The reason Powell has kept the federal funds rate in the range of 4.25%-4.50% is primarily due to concerns that Trump's tariff policies may exacerbate inflation. Historically, similar political interference has led to disastrous consequences. In the 1970s, pressure from the Nixon administration caused then-Federal Reserve Chairman Arthur Burns to maintain low interest rates during rising inflation, ultimately triggering double-digit inflation.

Powell admitted that tariffs "could lead to rising inflation, slowing economic growth, and increasing unemployment," which complicates any decision the Federal Reserve makes. If interest rates are cut too early, it could fuel inflation; if rates are kept unchanged, it could worsen the weakness in the labor market.

Mixed Economic Data

The current complex economic data adds fuel to this debate. Although the U.S. economy has largely avoided recession and achieved some form of "soft landing," the road ahead is fraught with uncertainty.

On one hand, inflationary pressures remain stubborn. The core Consumer Price Index (CPI) rose 0.3% month-on-month in July, the largest increase since January, with an annual rate of 3.1%. The Producer Price Index (PPI), which measures wholesale inflation, surged 0.9% last month, marking the largest monthly increase in over three years. These data suggest that tariffs may have begun to push up corporate costs, which will eventually be passed on to consumers.

On the other hand, the labor market is cooling. The U.S. added only 73,000 jobs in July, while employment data for May and June was significantly revised down by over 250,000. Wage growth has slowed from an annual rate of 6% in 2022 to about 3.9%. This data has led to divisions within the FOMC, with two governors voting in favor of a rate cut at the July meeting.

The Legacy Battle for Defending Independence

In the face of this complex situation, Powell is not expected to reveal the September rate decision in advance at Jackson Hole. Instead, his speech will focus on the Federal Reserve's monetary policy framework assessment conducted every five years. This is seen as a key strategy for him to defend the long-term independence of the Federal Reserve.

By adjusting the policy framework, Powell can establish guiding principles that can transcend his tenure, such as how to respond to supply shocks and how to rebalance the dual mandates of full employment and price stability. William English, a professor at Yale School of Management and former senior Federal Reserve official, expects that the Federal Reserve may revert to using "deviations" rather than "shortfalls" to describe employment conditions, a subtle semantic change that implies both an overheated and a cooled labor market are issues that need addressing, thus giving the Federal Reserve equal justification to raise or lower rates in different circumstances.

Joe Brusuelas, chief economist at RSM US, stated:

"My sense is that he views his legacy as maintaining the independence of the Federal Reserve."

The speech at Jackson Hole will not conclude this battle, but it will showcase how Powell balances his roles in managing the economy during a transition, responding to political hostility, and refining the decision-making framework. This is not just about a single rate decision; it is about whether the U.S. central bank can maintain its ability to breathe independently amid the storm