In the eye of the storm! Wall Street outlook: Goldman Sachs expects Powell will not explicitly mention interest rate cuts but will pave the way for actions in September

The Zhitong Finance APP noted that Federal Reserve Chairman Jerome Powell is about to deliver a speech during one of the most turbulent periods in the history of central banks, which is almost certainly his last keynote address at this year's meeting.

The current situation is affecting short-term sentiment in financial markets, the long-term trajectory of Federal Reserve policy, and how to strive to maintain the remaining dignity of its independence in the face of significant political pressure on this institution, which is usually considered sacred and inviolable.

If Friday's speech in Jackson Hole, Wyoming, aligns with Powell's style over the past seven years, then even if he conceals the pressure he and his colleagues have faced throughout the year, the speech will still maintain an appearance of calmness.

Michael Arone, Chief Investment Strategist at State Street Global Advisors, stated, "He has done a great job of maintaining the independence of the Federal Reserve, ignoring the noise and some doubts, and always focusing on data dependence and the Fed's dual mandate." "In maintaining the independence of the Federal Reserve, he has chosen a noble path, despite clearly facing pressure from the Trump administration. I believe he will continue to uphold this balance."

In fact, President Trump has continuously launched attacks on Powell and his colleagues. As he did for most of his first term, Trump has repeatedly urged Powell to cut interest rates. However, the president's recent attacks on the Federal Reserve have gone beyond monetary policy.

Earlier this summer, the White House harshly criticized the Federal Reserve for its significant reconstruction project at its Washington headquarters. At that time, Trump considered replacing Powell but later abandoned that idea.

This week, the government has turned its attention to Federal Reserve Governor Lisa Cook, accusing her of mortgage fraud in two federally guaranteed loans.

Caught in the eye of the storm, Powell may use this speech to at least push back against political interference, even if he will continue to refrain from directly naming his critics.

Politics and Policy

Dan North, Senior Economist at Allianz Trade North America, stated, "He will take the opportunity to emphasize the independence of the Federal Reserve; after all, what does he have to lose at this stage?" "Legally, Trump clearly cannot remove him, but he can undoubtedly exert tremendous pressure. I think this is a good opportunity for Powell to declare that the central bank must remain independent."

In addition to political factors, policy-making is also fraught with challenges.

The theme of this speech is "Economic Outlook and Framework Assessment," indicating that Powell will elaborate on his views on the macroeconomic situation and discuss the Federal Reserve's long-term policy goals—an assessment conducted every five years.

The market expects Powell to pave the way for a rate cut in September. Since his first appearance at Jackson Hole in 2018, his annual speeches have signaled significant policy shifts: from advocating for quarterly rate cuts in his debut to a fundamental shift in inflation views in 2020, and last year hinting at aggressive measures in September, the market has always captured signals from the chairman's keynote address.

Although Wall Street's commentary is somewhat understated, it reflects similar expectations.

"We expect Powell will not explicitly signal a September rate cut, but the speech should indicate to the market that he may support a rate cut," wrote Goldman Sachs economist David Mericle in a report The organizer of the Jackson Hole annual meeting, Kansas City Federal Reserve President Jeffrey Schmid, stated on Wednesday that he has not yet supported a rate cut in September and needs more data to back it up. In fact, currently only board members Christopher Waller and Michelle Bowman have publicly expressed support for action next month.

Merrick pointed out: "If Powell pushes for a rate cut, the majority of FOMC members who have conflicting views on a September rate cut may support the action. However, he believes a more reasonable approach would be to persuade them with more data as the meeting approaches."

The Tug-of-War Between Inflation and Employment

The key focus is on how Powell describes the labor market conditions and his views on the inflation transmission caused by Trump's tariff policies.

Shortly after the July Federal Reserve meeting, data released by the Bureau of Labor Statistics showed weak job growth in July, with even weaker data for May and June. However, several policymakers still described the labor market as "robust," indicating that they believe there is not an urgent need for a rate cut.

The minutes from the July meeting showed that the majority of FOMC members were more concerned about inflation. Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, and Schmid from Kansas City all expressed skepticism about the necessity of a rate cut in September, a stance that could anger Trump and disrupt the markets.

Krishna Guha, Global Policy and Central Bank Strategy Head at Evercore ISI, wrote: "Powell is likely to remain cautious and will not pre-commit to a rate cut in September, which may disappoint some investors. The speech may focus on providing a robust medium- to long-term framework for policy strategy and inflation control."

This adjustment in policy framework is also crucial but has not yet garnered sufficient attention from Wall Street.

Five years ago, against the backdrop of the COVID-19 pandemic and protests against police violence, the Federal Reserve adopted a "flexible average inflation targeting" framework. Essentially, this framework allows the Fed to tolerate inflation overshooting when unemployment rises, particularly affecting vulnerable groups.

In the following two years, the Fed remained inactive while inflation soared to its highest level in over 40 years. Although most officials deny that the adjustment of the inflation target is related to the widely held belief that inflation is "transitory," this policy is likely to be revised, and the Fed will return to a policy stance that includes mechanisms for responding to inflation signals.

Matthew Luzetti, Chief Economist for the U.S. at Deutsche Bank, pointed out: "While the new framework adopted in 2020 is not the main reason for the Fed's delayed response and severe inflation overshooting, it has indeed contributed to this outcome. Therefore, we expect Powell to emphasize the revision of the Fed's long-term goal statement in his speech to reflect reality. Specifically, the speech may call for the repeal of the 2020 modifications and restore the primacy of preventive policies."

Luzetti added that Friday's speech "comes at a critical moment," and he expects Powell to change his stance on the labor market