The global central bank annual meeting is about to kick off! Can Powell "stamp" the gamble for interest rate cuts?

According to Zhitong Finance APP, this week, bond traders are at a critical moment in their bet on the Federal Reserve's imminent interest rate cut—Federal Reserve Chairman Jerome Powell will make an important statement on the economic outlook.

His speech on Friday at the Jackson Hole central bank annual meeting in Wyoming will be a decisive moment for the Treasury market. The market is almost certain that the Federal Reserve will cut rates by 25 basis points next month and expects at least one more rate cut before the end of the year. In recent years, Powell has often used this occasion to release market-shaking policy signals, and this speech may have historical significance.

Despite recent unexpectedly hot inflation data causing some economists to hesitate, traders are confident that a weak labor market has paved the way for the Federal Reserve to shift to a dovish stance. The market generally expects that Powell will not overturn the expectation of a rate cut next month but may remind investors that the policy decision on September 17 will still depend on economic data before the meeting, confirming that the labor market continues to cool and inflation is under control.

"He has the ability to make moves that impact the market, but I'm not sure if he will do so," said Kelsey Berro, Executive Director of Fixed Income at JP Morgan Asset Management. "The bond market pricing still aligns with an environment of below-trend economic growth and a soft landing. I don't think they have sufficient reason to counter the market expectations."

Affected by the weak employment data in July, expectations for a rate cut in August led to a general decline in U.S. Treasury yields across various maturities, with the two-year yield leading the drop. The yield curve is currently steepening, with the two-year yield hovering around 3.75%, not far from its lows in recent months.

Uncertainties at the Central Bank Annual Meeting

This backdrop makes the Jackson Hole meeting highly anticipated. Three years ago, Powell warned that fighting inflation would bring pain, leading to a surge in short-term yields; at last year's meeting, he hinted at readiness to lower rates from a twenty-year high, causing the two-year yield to plummet that day. In the following September, the Federal Reserve indeed initiated a rate cut cycle, starting with a hefty 50 basis point move.

Some traders are preparing for history to repeat itself. Even after a spike in the producer price index, there are still a large number of options trades betting on a 50 basis point rate cut next month. If the market prices in a 40 basis point easing for the September meeting, these bets will be quite profitable.

U.S. President Donald Trump and his cabinet members have continuously pressured for rate cuts, further fueling such bets. For months, Powell has emphasized the need to observe the impact of tariffs on inflation, maintaining this stance in the face of political pressure from the White House.

Scott DiMaggio, Head of Fixed Income at Invesco, stated, "The Federal Reserve is under immense pressure. They have been somewhat lagging in their actions but have been waiting to assess the actual impact of tariffs on the economy and inflation."

DiMaggio believes that the current data has reached a level where one could say, "Yes, they should restart the rate cut cycle."

Decisive Data

After the Jackson Hole meeting, the market's focus will shift to the August non-farm payroll data to be released on September 5, which will determine the rate cut path for next month and could even trigger expectations for an aggressive 50 basis point cut. However, several investors admit that, in the context of high producer inflation, the probability of such a large cut is relatively low Gregory Faranello, Head of U.S. Rates Trading and Strategy at AmeriVet Securities, stated: "We believe everything will depend on the employment report. If the data is weak, the market will price in a 25 basis point rate cut, and Powell will not oppose this."

Current inflation remains stubbornly above the Federal Reserve's target, coupled with the potential fiscal stimulus from the Trump tax reform, a rapid rate cut may stimulate an overheating economy. Considering the pressure from the government on the Federal Reserve and the president's move to replace the head of the Bureau of Labor Statistics, long-term bond investors may demand a higher risk premium.

Ed Al Hussainy, interest rate strategist at Columbia Threadneedle Investments, said: "Implementing aggressive rate cuts early means the Federal Reserve must ignore the remaining upside risks to inflation and be confident that the unemployment rate will rise sharply."