Will Powell use Jackson Hole speech to push back on hopes for September rate cut?

Federal Reserve Chair Jerome Powell is expected to use his Jackson Hole speech to temper market expectations for a September interest-rate cut, despite recent weak payroll revisions and slowing inflation data driving investor sentiment. The Fed's rate-setting committee remains divided, facing significant external pressure for cuts, yet officials aim to avoid surprising markets. While some analysts anticipate a 25 basis point September cut is still likely, with pushback focused on a 50 basis point move, the internal debate between hawkish and dovish members, alongside upcoming jobs and inflation data, will be crucial in determining the Fed's next policy action.

Analysis

Federal Reserve Chair Jerome Powell is poised to use his upcoming Jackson Hole speech to actively manage market expectations, which have increasingly priced in a September interest-rate cut. This investor sentiment is driven by recent data showing weakening payroll growth and moderating inflation, amplified by political pressure for monetary easing. However, the Federal Open Market Committee is internally fractured, with no clear majority for either a hawkish hold or a dovish cut, signaling that any decision will likely face dissents. The debate centers on whether to preemptively support a softening labor market at the risk of re-igniting inflation. While some analysts, such as those at Morgan Stanley, still foresee a 25 basis point cut in September, others from firms like Comerica and Deutsche Bank anticipate a hold, labeling the decision a 'close call'. The Fed's aversion to surprising markets makes Powell's speech a critical event for signaling, with the ultimate decision heavily contingent on the forthcoming August jobs report and inflation data.

Key Decisions for Investors

• Investors should anticipate heightened market volatility and consider hedging against a hawkish surprise, as Fed Chair Powell is expected to use his Jackson Hole speech to push back against strong market expectations for a September rate cut.
• The upcoming August jobs report and inflation data are the most critical catalysts influencing the Fed's decision, and their outcomes should be closely monitored for potential shifts in monetary policy direction.
• Given the deep division within the FOMC and the data-dependent nature of the decision, it is prudent to re-evaluate exposure to rate-sensitive assets, as a hold would pressure growth stocks and long-duration bonds whereas a cut would provide a tailwind.