Jackson Hole may become a turning point for policy, will Powell speak cautiously?

Federal Reserve Chairman Jerome Powell will deliver a speech at the annual Jackson Hole symposium on Friday, with the market widely expecting him to signal a rate cut. However, the conflicting economic data may prompt him to adopt a cautious stance. This speech in Wyoming has the potential to become a policy turning point, but the chaotic economic indicators present Powell with a dilemma.

Although the weak non-farm payroll data for July provides ample justification for a rate cut, the PPI inflation recorded its largest increase in three years, reigniting concerns about inflationary pressures caused by tariffs, making the previously seemingly certain prospect of a September rate cut uncertain.

Against the backdrop of Trump's strong pressure for a rate cut, Friday's speech has become the focus of the entire market, which will closely monitor any adjustments Powell makes regarding the labor market and policy stance. However, given that more economic data will be released before the September meeting, Powell may choose to maintain "strategic ambiguity."

How are Powell and the market playing their game?

The bond market has already shown strong confidence in a September rate cut. The two-year U.S. Treasury yield has fallen sharply this month, with traders almost fully pricing in a 25 basis point rate cut. This expectation surged significantly after last month's unexpectedly weak employment report, although last week's disappointing PPI inflation slightly tempered this expectation.

"Even if I expect him to generally point towards a rate cut at the next meeting, I think he will base it on a highly data-dependent message," said Jonathan Pingle, Chief U.S. Economist at UBS Securities. "I don't think he will lock in that decision."

Investors are waiting for Powell to either confirm this market pricing or remind the market that new data before the next policy meeting could change the situation. The market is also looking for clues about the long-term trajectory of Fed rate cuts next year.

"Part of the strategic debate is whether to start early and proceed slowly, or to start later but more aggressively," analyzed Ed Al-Hussainy, interest rate strategist at Columbia Threadneedle Investments.

Policy Framework Assessment and Farewell Speech Color

Some analysts point out that Friday's speech will be Powell's last at the Jackson Hole symposium before his term expires in May next year, and according to the customary practices of former chairs, this may give it a farewell speech quality. Trump's criticism of Powell's leadership and attempts to interfere with the Fed's independence add a special context to this speech.

"Former chairs have reason to use their last speeches at Jackson Hole to reflect on their terms," Pingle said. "This is their opportunity to record their history."

In addition to the interest rate path, Powell is expected to share the latest thoughts on the ongoing policy framework assessment by the Fed. The current framework dates back to 2020 when the Fed made two key adjustments: allowing inflation to exceed the 2% target for a period and abandoning the idea of automatically raising rates solely due to an overheating labor market.

Unfortunately, these adjustments took effect just before the pandemic triggered the worst inflation in forty years. Critics argue that the new framework is ill-suited to address the pandemic price surge and led to a delayed response from the Fed Powell has indicated that the content of these two frameworks may face modifications.

Divergence in Economic Data and Intensifying Policy Discrepancies

Currently, Powell and most of his colleagues are taking a wait-and-see approach to monetary policy. They are concerned that the U.S. may face persistent inflation issues as Trump raises import tariffs to the highest level in a century.

Although this has not yet led to a significant increase in consumer prices, July's PPI inflation suddenly accelerated, and businesses typically pass these costs onto consumers after a period.

Meanwhile, the consensus within the Federal Reserve on a patient policy has fractured—primarily due to a weakening labor market. Two Federal Reserve governors appointed by Trump, Christopher Waller and Michelle Bowman, voted in favor of a rate cut at the July decision-making meeting, opposing the decision to maintain rates.

Trump has leveraged these dissenting votes to escalate his calls for a rate cut, stating that the Federal Reserve should lower the benchmark rate by as much as four percentage points, with the current benchmark rate remaining in the range of 4.25% to 4.5% throughout the year.

Treasury Secretary Scott Bessent also expressed support for a 50 basis point rate cut in September last week. However, San Francisco Fed President Mary Daly, while believing that there may be two rate cuts this year, denied the necessity for a significant cut next month, stating that it would create unnecessary urgency.

"The post-pandemic economy is a sharp reminder that we may face an overheating labor market and inflation far above target," summarized Wells Fargo senior economist Michael Pugliese, "I believe the Federal Reserve will strive to connect these lessons with the current risk environment of symmetrical balance."