The Federal Reserve Chairman is facing a monetary policy crossroads in Jackson Hole

The President is expected to beginFederal Reserve“The American Jerome Powell The next chapter in his battle against Inflation On Friday, he is expected to set the stage for lowering interest rates, while reassuring investors about the ability of monetary policy makers to avoid a major economic downturn.

This highly anticipated speech at the Federal Reserve’s annual meeting in Jackson Hole, Wyoming, comes at a critical time for the US central bank and the $27 trillion Treasury market. Powell and his colleagues are moving toward lowering borrowing costs seven weeks before the presidential election, a sensitive move that will put them under intense scrutiny. This also coincides with increased attention by officials to the slowing labor market after years of intense focus on price pressures.

“The question is: Will we have a monetary policy error?” That’s why the market is worried about the Jackson Hole report,” said Joseph Bruswells, chief economist at RSM US. He added: “What we need to hear from the Federal Reserve Chair is the central bank’s position on the a possible shift in monetary policy”.

Investors are nervous

Investors are nervous as they try to anticipate the pace and size of the cuts Interest rates Coming. July’s labor market data sparked notable market volatility in early August, with the US S&P 500 stock index losing more than 6% in three trading days. Income rose Bonds The Government, and traders expected for several days that the Federal Reserve would cut interest rates significantly in September by 50 basis points.

In the past, Powell and other monetary policy makers have made mistakes. Although they succeeded in bringing inflation back towards their target of 2%, this came after they were late in dealing with the rise in prices due to the pandemic. Federal Reserve officials are now trying to avoid making the same mistakes in the labor market as price pressures ease.

However, the historically strong labor market is beginning to show signs of weakness. Last month, US companies slowed the pace of hiring, and unemployment rates rose for the fourth time in a row, raising concerns that high interest rates could push the labor market to the limit. turn, which led many economists to expect the government on Wednesday. to carry out a major downward revision of the Hiring reports for the year through March.

Employment reports

The key question for those following Powell, particularly in bond markets, is whether another weak earnings report will lead to a bigger cut next month, or prompt the Fed to take a more aggressive approach to rate cuts in the coming months. Powell will deliver his speech at 10 a.m. New York time next Friday at the Federal Reserve’s Economic Policy Conference in Kansas City.

“There could be an argument for speeding things up a bit first (ie a big rate cut in September) and then slowing down,” said Matthew Luzetti, chief economist at Deutsche Bank. “I think this argument will only become stronger if there are signs that there is more weakness in the labor market,” he said.

When Powell spoke a year ago in Jackson Hole, he and his colleagues seemed to be on the opposite side. The Federal Reserve had just raised its interest rate to a range of 5.25% to 5.5%, the highest rate in a generation. Powell said the labor market was tight, considering inflation was “very high,” and noted that the Federal Reserve is “willing to raise rates further if necessary.”

Slowing inflation

There has been a slowdown since then. Although inflation remains above the Federal Reserve’s target of 2%, it has slowed significantly. One of the main indicators measuring the underlying price pressure fell in July for the fourth month in a row, confirming the downward trend.

“We expect him to recognize that the conditions are right for them (Fed officials) to start tightening,” said Pooja Sriram, an economist at Barclays. rate cut) in September clearly or not, but the message is that they are in a good position to do so.

Powell’s message this year requires precision. The reasons for a rate cut should be strong enough to withstand the political pressure surrounding the Fed in this election year. This could include pointing to a slower labor market and slowing growth. However, according to Laura Rosner-Warburton, chief economist at MacroPolicy Perspectives, he would not want to send an overly negative message about the economic outlook.

“A change down doesn’t mean there’s an error,” she explained. “In order not to send a negative signal, the Fed needs to be very clear in its message,” she said.

Since the market turmoil in early August, bond market traders have cut their expectations for the number of rate cuts as risk assets recover and recent data, including figures showing that layoffs will remain at low levels, and strength in US spending, indicating that the economy. .. Not in a state of collapse.

Market diseases

Currently, traders are pricing in a quarter-point cut next month, while expecting a total cut of between 75 and 100 basis points by the end of the year, compared to their previous forecast. between 100 and 125 basis points on August 2.

Asked about the possibility of a 50 basis point cut in July, ahead of the release of the latest employment data, Powell said: “I don’t want to be too specific about what we’re going to do, but it’s not something that we are going to do it. I’m thinking about it now.”

Powell and other Fed officials have repeatedly emphasized that monetary policy decisions will be guided by the “totality” of incoming data. An additional earnings report and two inflation statements will be released before the FOMC meeting on September 17-18.

“Without this information, Powell cannot definitively say in Jackson Hole whether they will cut rates by 50 or 25 basis points,” said Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management. She said: “It will leave the field open, and keep the options available as they should be.

The theme of this year’s Jackson Hole conference is “Reassessing the Effectiveness and Transmission of Monetary Policy,” a fitting topic since many investors and economists are also wondering how quickly and to what extent the rate cuts in the coming months.

Developments in the economy as a result of the Covid-19 pandemic have complicated this consideration. Some Fed officials believe that the neutral rate – which indicates a monetary policy stance that neither slows nor stimulates the economy – may have risen since the pandemic, raising mis- sure about how restrictive the central bank’s policy is.

“They don’t really know the bottom line,” said Laura Rosner-Warburton of Macro Policy Perspectives. “I think Powell will emphasize that uncertainty, and point to the direction that the data provides,” she said. that end point, and they can move slower or faster as economic conditions dictate.”