What to Expect from Fed Chair Powell's Speech on Friday: 3 Key Scenarios

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2 days ago

Key Takeaways
Federal Reserve Chair Jerome Powell's speech at the Jackson Hole economic conference could shed light on whether the central bank will cut interest rates in September.
Powell may signal that the Fed will pivot to cutting interest rates on concerns that a recent slowdown in the job market could turn into a worrisome rise in unemployment.
On the other hand, Powell could throw cold water on that idea, since inflation has started to rise after President Donald Trump's tariffs went into effect.
Powell could also avoid addressing the issue one way or another.
Wall Street will be listening closely to Federal Reserve Chair Jerome Powell's speech Friday at the Jackson Hole economic policy summit, where he could signal whether the central bank is ready to cut borrowing costs at its next meeting in September.Powell is scheduled to deliver a speech entitled "Economic Outlook and Framework Review" at 10 a.m. Eastern Time. The talk could shed light on how the Fed chief is thinking about the central bank's battle to bring down inflation, and whether he thinks the Fed is ready to cut its benchmark fed funds rate from its current range of 4.25% to 4.5%, a level he and other Fed officials consider high enough to "moderately" weigh on economic growth and put downward pressure on inflation.In recent years, Powell has used the annual Jackson Hole speech to signal major changes in monetary policy. In 2024, he confirmed the Fed was about to cut rates for the first time in more than a year, after holding the Fed funds rate high to stamp out a post-pandemic wave of inflation. This time, Powell could use the summit to signal whether the Fed is ready to resume rate cuts for the first time since December.Powell may also shed light on how he views the Fed's current dilemma. The central bank is tasked with using monetary policy to keep inflation low and employment high. But lately, both of those economic indicators have gone in the wrong direction after President Donald Trump launched his unprecedented campaign to raise import taxes.Experts expect the speech to go one of at least three ways:
Signal A Rate Cut Is Coming
Powell could use the speech to signal that the Fed will cut interest rates soon, possibly when its policy committee announces its next meeting in September. Financial markets were pricing in an 83% chance of a rate cut as of Monday afternoon, according to the CME Group's FedWatch tool, which forecasts rate movements based on Fed funds futures trading data.Powell and other Fed officials have voiced concerns that the recent slowdown in the job market could turn into a more serious wave of unemployment. Those fears were supercharged earlier this month by a Department of Labor report that showed job growth unexpectedly ground to a halt this summer."With the labor market already near the limit of what could be called maximum employment, we suspect that weak job growth and concern about further downward revisions and downside risks have already convinced the Fed leadership to resume rate cuts," David Mericle, chief U.S. economist at Goldman Sachs, wrote in a commentary.
Throw Cold Water On Hopes For a Cut
On the other hand, Powell could use the opportunity to remind everyone that the Fed's other economic nemesis, inflation, is far from vanquished, making him reluctant to cut interest rates. Recent reports indicate that tariffs are showing up on store shelves, and, ominously, in wholesale prices. That's fueled concerns about a resurgence of inflation, which is still running above the Fed's goal of a 2% annual rate.Given the alarming inflation data, market participants may be too optimistic about a September rate cut. Economists at Brean Capital Markets, John Ryding and Conrad DeQuadros, wrote in a commentary that Powell may seek to curb their enthusiasm."Powell may not want to say that a cut is off the table on September 17, but he needs to say something like: 'At this point, there are some discomforting readings on inflation that are inconsistent with the attainment of the 2% inflation target and based on the evidence to date, I am not inclined to support a rate cut at the next FOMC meeting,'" they wrote.
Stay Noncommittal, Wait For More Data
With data pulling the Fed in both directions, Powell may be reluctant to signal a strategy just yet, especially since one more round of major economic indicators is due before the FOMC makes its monetary policy decision."If Chair Powell carves out part of the speech with an update on the outlook for policy, we expect he remains data dependent," economists at UBS led by Jonathan Pingle wrote in a commentary. "We doubt he commits to a September rate cut specifically."
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