The Jackson Hole Economic Symposium is set to take place this week. It is an annual gathering of central bankers, economists, academics, and financial market participants from around the world. The event is hosted by the Federal Reserve Bank of Kansas City and is held in Jackson Hole.
This year, investors, ever the optimists, are betting that Federal Reserve Chairman Jerome Powell will confirm the much-anticipated interest rate cuts at the annual Jackson Hole gathering. But investors might find themselves sorely disappointed as the conversation shifts from “Will they or won’t they?” to “How much will they cut?”
It’s a classic case of market wishful thinking, where expectations run high, but reality often lags behind.
Fund managers, who have recently plunged into extensive tech stocks chasing the S&P 500, are banking on the Fed slashing borrowing costs at its next meeting in September. Yet Powell might just play the elusive card, offering little to no hints about the timing of rate cuts when he speaks on Friday. In true Powell fashion, he might adopt a cautious and vague approach, keeping everyone guessing about just how deep the rate cuts might go once the Fed decides to ease.
Markets are so confident that rate cuts are imminent that it would be a massive surprise if Powell didn’t confirm this path. But here’s the kicker: if Powell doesn’t deliver the magic words, that $3.3 trillion rally in the S&P 500—driven by an earlier global growth scare—could unravel faster than you can say “rate hike.”
Looking at past Jackson Hole speeches, it’s unlikely we’ll get any prescriptive remarks from Powell. The FED governor might hint that a tight monetary policy is no longer necessary. But do not expect more details on the size of the first cut, especially with an employment report due on 6 September.
Historically, Powell’s Jackson Hole speeches have rarely moved markets unless they foreshadowed a significant policy shift—like his appearance in August 2022 when he warned of the need for restrictive monetary policy to curb inflation, sending stocks tumbling by 3.4% that day and another 3.3% in the following week.
This time, investors are clinging to the hope that the Fed has achieved the elusive soft landing by taming inflation without wreaking economic havoc. The expectation? A spectacular take-off.
With three more policy meetings left in 2024, investors are betting the Fed will react to job market weakness by cutting rates as inflation inches closer to the 2% target. Powell, however, doesn’t need to rattle the markets. He must assure everyone that inflation is declining and that the Fed is ready to bring restrictive rates back to a more neutral level.