The road to higher U.S. stocks still has obstacles! Investors await Powell to give the "green light" for interest rate cuts
U.S. stocks may face obstacles on the path to further gains, as investors focus on Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole annual meeting. If the pace of interest rate cuts is slower than expected or if rate cuts are completely abandoned, the market will be affected. Despite the possibility of rate cuts, Powell may not provide a clear timeline for rate cuts, as inflation remains above target. Options traders expect the S&P 500 index to fluctuate in both directions by 0.9%
According to the Zhitong Finance APP, if the Federal Reserve's pace of interest rate cuts is not as swift as the market expects, or if it completely abandons the idea of cutting rates, then the U.S. stock market may encounter obstacles on its path to further gains. Wall Street's attention is focused on Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole Global Central Bank Annual Meeting on Friday. Although traders speculate that a slowdown in job growth may open the door for the Fed to adopt a more dovish stance, the greater risk is that Powell remains tight-lipped about the policy path following a series of unexpectedly high inflation data.
Jon Hilsenrath, a senior advisor at StoneX Group, stated, "Powell's situation is indeed difficult. He may acknowledge that a rate cut in September seems likely, but he will not provide a timeline for a series of cuts, as the Fed's work on inflation is not yet complete." Hilsenrath indicated that Powell might hint at a preference for a 25 basis point cut in September, but due to uncertainties surrounding tariffs and inflation, he is unlikely to release more information.
This is undoubtedly a significant challenge for investors who re-entered the market after the S&P 500 index bottomed out in early April due to tariff fears. According to data compiled by Piper Sandler, options traders expect the S&P 500 index to fluctuate by 0.9% in both directions on Friday.
The Federal Reserve has three policy meetings left in 2025. Traders bet that the Fed will choose to cut rates due to a weakening labor market. However, the question is that the job market is only one part of the Fed's dual mandate, the other being inflation, which remains stubbornly above the Fed's 2% target. Whether the Fed can curb rising prices without slowing economic growth remains an open question.
Currently, the interest rate swap market indicates that the Fed will cut rates by at least 50 basis points by the end of the year, with a 72% probability of a rate cut in September—down from nearly 100% before last week's inflation data was released.
Unless there is a significant shift in monetary policy, the Jackson Hole Central Bank Annual Meeting typically does not have a major impact on the stock market. Data compiled by Bloomberg Intelligence shows that since 2000, the S&P 500 index has averaged a 0.4% increase in the week following the Jackson Hole Central Bank Annual Meeting.
That said, Powell has indeed used this occasion in recent years to make some policy statements that have influenced the market. For example, at last year's Jackson Hole Central Bank Annual Meeting, Powell stated that the "timing for a rate cut has arrived." This statement pushed the S&P 500 index up by more than 1% that day. In 2022, Powell warned that the Fed would need to maintain a restrictive monetary policy to combat inflation. This hawkish remark led to a 3.4% drop in the S&P 500 index that day, followed by another 3.3% decline in the subsequent week This time, when Powell is about to give a speech, he does not have all the data needed for the Federal Reserve to decide on interest rates. The Fed's decision will also rely on the U.S. non-farm payroll report for August, which will be released on September 5, and the consumer price index to be published on September 11. Andrew Tyler, head of global market intelligence at JP Morgan, stated, "Jackson Hole may ultimately prove to be irrelevant."
In addition, the inflation indicator favored by the Fed—the core PCE price index—will be released next week. The market currently expects the July core PCE price index to rise 2.9% year-on-year. Due to tariffs driving up prices of imported goods such as household furniture and entertainment products, the U.S. June core PCE price index rose 2.8% year-on-year.
Patrick Fruzzetti, portfolio manager at Rose Advisors, said, "Powell has taken this balanced approach before. I don't think he will signal a significant rate cut, nor do I think he will become more hawkish." He added, "I expect Powell may hint that policymakers still prioritize inflation over job growth at this time."
