What to Expect from the Jackson Hole Meeting

The Fed will host its annual Jackson Hole Symposium (JHS) in Wyoming starting August 24, Thursday. In the past, the Chair of the Federal Reserve, Jerome Powell, has used the event as an opportunity to guide the markets on what to expect regarding policy in the future. On Friday, August 25, the Fed Chair will deliver his speech, and it is once more anticipated that he will provide clues on future monetary policy decisions for later this year. His comments are expected to sway market expectations on a potential final rate decision in the coming months.

Last year, on August 26, he offered a relatively short but dramatic speech in which he wowed markets by promising to pull out all the stops to bring down inflation and wouldn't let the potential economic pain get in the way. After Fed Chair's remarks, the Dow Jones (USA 30), S&P 500 (US 500), and Nasdaq (US-TECH 100) experienced significant declines, ending a two-day winning streak. The tech-heavy Nasdaq crashed 3.9%, recording its worst day in over two months. 

Fed Chair Powell's speech for this year’s JHS is expected to start at 10:05 Eastern Time (ET) on Friday. Trading has so far remained in a narrow range ahead of the Friday event, with the US Dollar Index (DX) sliding slightly over 0.2% in Tuesday's trading, August 22. During the same session, the tech-heavy Nasdaq was seen as resilient, despite pressure from higher bond yields, as investors considered what the Fed could signal regarding rate hikes.

What Could Powell Say?

Twelve months after the last Jackson Hole Symposium, inflation has been down by two-thirds, and the economy continues to show dynamism, with the unemployment rate barely lifting off record lows. Some note that the Fed seems to be doing a good job getting inflation closer to its 2% annualized target rate by raising rates and cutting its balance sheet while avoiding a recession or other "unfortunate costs", as Powell put it in his 9-minute speech last year.

While it may be an auspicious time for the central bank, inflation is still around 50% above the Fed’s target of 2%, with the board now considering whether it's time to end its recent rate-hiking campaign. It could be an opportunity for Powell to stake his legacy amid both a schismatic political campaign and a volatile economic situation. The head of the Federal Reserve will have to perform a delicate balancing act ahead of an election year and when the economy is performing better than expected. (Source:Barrons)

Setting up Expectations for the Market

Since the last time the Fed met on July 25-26( where it raised rates but left open the possibility of a pause in September), inflation reports have been better than expected but hiring slowed faster than expected. Both data points suggest that the Fed could end its rate-hiking campaign that has raised rates to a top target of 5.5%. On the other hand, another round of inflation and jobs data is still to be released before the next Fed policy meeting on September 19-20. That leaves open the possibility of surprises to the market.

Moreover, the Federal Reserve's GDPNow model expects the economy to grow at 5.8% this quarter but will likely come down as the quarter progresses. Economic headwinds are seen rising from the effects of higher interest rates. The Fed has already “abandoned explicit forward guidance” about rates, saying it's now data-dependent. As a result, this has led analysts to tone down expectations of specific previews for policy. Rather, Powell could point to inflation and the jobs market moving in the right direction but caution that rates will remain restrictive for a long time. He might suggest that rates go up again if necessary.

Beyond Powell's Speech

The European Central Bank (ECB) President, Christine Lagarde, is also expected to speak on Friday. Naturally, her comments will also be closely scrutinized for what the shared central bank could do when it gathers again on September 14. The Eurozone has seen inflation coming down, but it remains far above target, while the economy has essentially stagnated for the last three quarters. 

However, despite the volume of central bank speak at the event, which is expected to dominate financial news this week, analysts suggest it's unlikely there will be much new guidance on near-term policy. Markets still absorb higher bond yields as investors accept that interest rates might stay elevated longer due to better economic performance.

Conclusion

Fed Chair Jerome Powell's speech is expected to be the highlight of the Jackson Hole Symposium, which starts on Thursday. He is expected to offer some clues about the future of monetary policy decisions as the market remains divided about rate hikes. Powell's remarks could sway some expectations about what the Fed could do over the coming months and, with it, market expectations. It will be interesting to see how this anticipated event will affect the markets.