Could Fed chief Powell finally reveal his hand at Jackson Hole?

Markets are gearing up for the Jackson Hole Symposium

The much talked-about Jackson Hole Symposium is just a few days away with the markets anxiously waiting for Fed Chairman Powell’s speech. The overall Fedspeak during this 3-day gathering could determine the Fed’s rate strategy for the rest of 2024, but also set the basis for its monetary policy stance in 2025.

Following the recent stocks’ rout, which was fueled by US recession fears, the market is currently pricing in 95bps of easing in 2024 and another 105bps in 2025. According to the latest Reuters poll, most investment houses expect three rate cuts in 2024, but some diehards continue to talk about a 50bps rate cut in September.

Fed minutes and PMIs to serve as the appetizer

Ahead of the Jackson Hole gathering, and specifically on Wednesday the minutes of the July 31 Fed meeting will be published with the preliminary PMI surveys for August following a day later. Usually, Fed minutes do not hold surprises. However, they could prove market-moving this time around if a greater appetite for rate cuts is revealed on Wednesday than the one portrayed by Chairman Powell on July 31.

In the meantime, Thursday’s PMI survey prints are expected to show a small improvement for both the services and manufacturing sectors, despite the latter still hovering below the 50 threshold. Such an outcome could serve as another confirmation of Powell’s comment at the last Fed press conference that “the picture is not one of a slowing or really bad economy”.

Powell will speak on Friday at 14:00 GMT

On Friday, Chairman Powell is expected to present his view on the current US economic outlook. He will most likely talk about the ongoing easing in labour market tightness, the growing level of confidence regarding the disinflation process and the Fed’s willingness to cut rates.

It is a crucial test of Powell’s ability to appease Fed members in order to secure strong support going into the September meeting, and to avoid attracting the ire from both US Presidential candidates and especially Donald Trump.

Putting together this week’s events, there are four likely scenarios:

Scenario 1: Dovish minutes, Powell pre-announces a September rate cut at Jackson Hole - 10% probability

This could be the perfect scenario for the market as not only Powell will reveal the worst kept secret that the Fed will cut rates in September, but he could also keep the market hoping for a 50bps rate cut. Barring any comments about an imminent US recession from Powell, equities could enjoy another strong day with the dollar most likely suffering across the board.

Scenario 2:  Dovish minutes, Powell is dovish but does not pre-announce a rate cut - 50% probability

Powell confirms expectations by talking about Fed’s willingness to cut rates if the current momentum in the economy is maintained and assuming that no negative surprises come from both the Middle East and Russia-Ukraine conflicts. Stock markets could feel a degree of disappointment, but the recent positive sentiment should linger. The dollar will probably remain under pressure across the board in this scenario.

Scenario 3:  Balanced minutes, Powell talks about data dependency – 30% probability

A more balanced speech by Powell, highlighting data dependency, but keeping the door firmly open to rate cuts, if needed, might upset the market and potentially result in a small correction in equities. The recent rally in stocks has been very gradual, potentially reflecting low confidence from investors. The dollar might have the chance for a small rebound, especially against the euro.

Scenario 4: Balanced minutes, Powell appears hawkish - 10% probability

A strong set of PMI surveys on Thursday and Powell appearing more hawkish than anticipated could really result in a sizeable risk-off reaction. Powell could acknowledge the progress made regarding the Fed’s dual mandate but state that the Fed has not reached the point of seriously discussing rate cuts. Equities could be under severe pressure with the dollar potentially recouping most of its losses during August.