The most comprehensive guide to the Jackson Hole meeting: Everything you must know before Powell's speech

This Friday, global financial markets will focus on Jackson Hole at the foot of the Teton Mountains in Wyoming.

At that time, Federal Reserve Chairman Jerome Powell will deliver a speech at the Jackson Hole Global Central Bank Conference, and the market is closely watching whether he will open the door for a rate cut in September. Currently, money market traders expect an 80% chance of a 25 basis point rate cut in September. The Jackson Hole conference has historically been an important platform for the Federal Reserve to convey policy signals, and Powell's speech in 2023 guided market expectations for the first rate cut in September.

This year's conference theme is "The Transforming Labor Market: Demographics, Productivity, and Macroeconomic Policy." On the surface, it is an academic topic, but the actual signal conveyed is: After inflation has receded, the Federal Reserve is shifting its focus back to employment. As cracks appear in the labor market, subtle adjustments in policy tone may directly determine market trends in the coming months.

At the same time, this conference may also involve some results from the Federal Reserve's framework review. Several major investment banks expect Powell may partially reverse the Flexible Average Inflation Target (FAIT) policy introduced at the 2020 meeting, rebalancing the Federal Reserve's dual mandate of employment and inflation.

Focus on Powell's Views on the Labor Market

Powell will deliver a speech titled "Economic Outlook and Framework Review" at 10 AM Eastern Time on Friday (10 PM Beijing Time). The market's focus is on how he evaluates the signs of weakness in the U.S. labor market shown in the July employment report, and whether this data is sufficient to prompt the Federal Reserve to initiate a rate cut cycle at the September meeting.

Powell warned at the July FOMC press conference that the potential for new job growth in the U.S. labor market is declining, due to factors such as a slowdown in immigration and an aging population, referred to as the "employment growth threshold" declining. The significant downward revision of the July non-farm data confirmed this: job growth may have nearly stagnated, the unemployment rate rose to 4.2% (still below the long-term average), and while wage growth has slowed, it has not fully receded.

The July non-farm employment report not only showed data significantly below expectations but also made substantial downward revisions to the previous two months' data, which the Bureau of Labor Statistics described as "greater than normal levels" (with a two-month net revision of -258,000), raising market concerns about the labor market's condition. The subsequently released CPI data was mixed, generally viewed by the market as "not as hot as feared," further raising expectations for a rate cut in September.

According to Goldman Sachs economist David Mericle's forecast, Powell may modify his statements from the July FOMC press conference, no longer emphasizing that the committee is "well positioned" to wait for more information. Instead, he may point out the risks the Federal Reserve faces in fulfilling its dual mandate while emphasizing the downside risks to the labor market shown in the July employment report, thereby conveying to the market the intention to support a rate cut if necessary

Will the Federal Reserve's Policy Framework Be Adjusted?

Jackson Hole has traditionally been seen as a barometer for Federal Reserve policy. Over the past five years, it has almost annually brought about a "policy turning point": hinting at easing in 2019, introducing the Average Inflation Targeting (FAIT) in 2020, continuing easing leading to misjudgment in 2021, shifting to aggressive tightening in 2022, signaling the end of rate hikes in 2023, and releasing signals for rate cuts in 2024.

A major highlight of this year's meeting is the framework review adjustment. Goldman Sachs and Deutsche Bank expect that the Federal Reserve may partially revise the FAIT framework introduced at the Jackson Hole meeting in 2020.

Goldman Sachs believes that the Federal Reserve may return to a more traditional "dual deviation from employment" target (focusing on both underemployment and overheating), while abandoning the "average inflation target" and re-adopting "flexible inflation targeting" as the main strategy. However, when interest rates reach the zero lower bound, some compensatory tools may still be retained.

Deutsche Bank is more aggressive. They point out that the framework reform in 2020 was a significant driver of inflation overshooting, therefore they expect Powell's speech to call for the repeal of the 2020 modifications and restore the dominant role of preventive policy adjustments.

If these expectations materialize, the "turning point effect" of Jackson Hole may reoccur: the framework set in 2020 may be partially revised by 2025.

One Rate Cut This Year? Three? Huge Discrepancies on Wall Street

Regarding the Federal Reserve's rate decision in September, there are significant discrepancies on Wall Street regarding the expected number of rate cuts, with different institutions focusing on various interpretations of employment and inflation data.

Goldman Sachs leans towards a dovish stance, expecting that while Powell will not signal a rate cut in September explicitly, he will clearly indicate his potential support for such action.

The firm believes that the Federal Reserve may implement three 25 basis point rate cuts this year. The reasoning is based on the July non-farm payroll data and revisions from the previous two months showing a significant slowdown in employment growth. Although the unemployment rate is low, the potential for new job creation is declining, and market and wage pressures remain manageable. Goldman Sachs expects the Federal Reserve to act decisively to prevent further deterioration in the labor market.

Barclays, on the other hand, believes that the market is overly confident about a rate cut in September, with their baseline forecast indicating that the next rate cut will occur in December. Barclays points out that Powell hinted at the committee's reluctance to adjust rates during the July FOMC press conference, and they believe that the latest employment report data does not fully contradict Powell's statements.

JPMorgan takes a more cautious approach, with their market intelligence team noting in a report that the Federal Reserve's decision on a September rate cut will depend on the non-farm payroll data on September 5 and the CPI data on September 11, thus the Jackson Hole meeting "may not have a substantial impact."

How the Market Trades the Jackson Hole Meeting Sentiment

Historically, the bond market has typically reacted significantly to the Jackson Hole meeting. According to Bloomberg data, U.S. Treasury yields have often shown notable fluctuations during the meeting in recent years.

Goldman Sachs U.S. Treasury trader Kyle Peterson believes that this year's Jackson Hole meeting will not bring significant new information, stating, "The threshold for a 50 basis point rate cut is extremely high, and I don't think we have seen enough data to support that." He suggests taking profits on any long positions at this stage and maintaining a neutral stance.

In the foreign exchange market, Goldman Sachs forex trader Sarah Stone notes that while most market participants believe that the important events in September are more worthy of attention, they have "more or less completely overlooked this weekend's Jackson Hole meeting," underestimating the possibility of Powell turning dovish.

Goldman Sachs derivatives strategist John Marshall points out that ahead of the Jackson Hole meeting, the option prices of most ETFs are relatively low compared to historical levels, particularly for ETFs related to high-yield bonds, emerging markets, and the S&P 500 index. Investors expect volatility related to ETFs associated with regional banks, real estate, and the technology sector to increase.

As the meeting date approaches, market participants are reducing their short positions in the dollar and are protecting against potential risks from the meeting by purchasing "cheap" dollar call options.