New York
CNN
—
What do a mountain retreat and economists have in common? Almost nothing, except for an annual, invitation-only summit hosted by the Federal Reserve Bank of Kansas City at Jackson Lake Lodge, nestled in a valley next to the Teton Mountains outside Jackson Hole, Wyoming.
It’s that time of year again. Over the next three days, top economists from around the world will be mingling with reporters and investors hungry for clues about the economic outlook. But you won’t need an invitation to hear what will undoubtedly be the talk of the valley: Federal Reserve Chairman Jerome Powell’s keynote speech, scheduled for Friday at 10 a.m. ET.
His speech comes at a pivotal time not only for the U.S. economy but for Federal Reserve officials as well.
Last month, the U.S. unemployment rate unexpectedly jumped to 4.3%, its highest level since October 2021. Meanwhile, employers hired just 114,000 new workers in July, the second-smallest monthly gain since December 2020. The disappointing data has raised concerns that the economy could soon be in recession — or worse, already in one.
That has left the Fed under fire for not cutting interest rates at its last meeting, which came just two days before the July jobs report. Now, with the labor market slowing and inflation just a hair below the Fed’s 2% target, the central bank is widely expected to cut rates in September. But some economists worry that central bankers have waited too long, and that the delay could exacerbate weakness in the labor market.
New data released by the Bureau of Labor Statistics on Wednesday did little to assuage those concerns. While not yet finalized, the agency’s annual review of employment data suggests there were 818,000 fewer jobs in March than initially reported.
Because of this, there is an increasing share of investors now. We think the Fed could opt for a half-point cut next month instead of the usual quarter-point cut, according to Fed funds futures data. In addition, the data has increased the odds that the Fed will cut interest rates more than once this year.
Where does Powell stand on this speech? We’ll find out on Friday.
Last year, investors interpreted Powell’s Jackson Hole remarks as a signal that the Fed had already raised interest rates, even though Powell said it was still possible. Markets soared, with the Dow Jones Industrial Average adding 241 points, or 0.7%. Their interpretation turned out to be correct—the Fed hasn’t raised rates since July.
Powell’s 2022 keynote address at Jackson Hole got the exact opposite reaction. It was that officials would not apologize in their fight against inflation, even if it meant inflicting “pain,” as Powell put it, on households and businesses. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all closed down at least 3% that day.
Three-quarter point rate hikes followed at subsequent Fed meetings after Jackson Hole that year.
Powell isn’t the only Fed chair to use Jackson Hole as an opportunity to preview monetary policy changes.
For example, in 2010, then-Fed Chairman Ben Bernanke signaled that the central bank was likely to ease financial conditions further as the economy recovered from the Great Recession, saying that “policy options are available to provide additional stimulus.” Months after Bernanke’s Jackson Hole speech, he unveiled a whole new phase of bond buying in an attempt to lower interest rates to stimulate the economy after the financial crisis. This measure is now known as QE2, short for quantitative easing.
Then in his 2012 Jackson Hole speech, Bernanke said the labor market slump was a “major concern.” Markets initially fell after Bernanke’s comments, but ended the day higher. Shortly after the Jackson Hole meeting, the Fed launched its third round of quantitative easing.
In 2016, then-Fed Chair Janet Yellen, now Treasury Secretary, used her Jackson Hole speech to prepare markets for more rate hikes, saying she believed “the case for raising the federal funds rate has strengthened in recent months.” Starting in December 2016, the Fed raised rates roughly every three meetings through 2018.
Economists expect Powell’s speech to strike a dovish tone: when central bankers favor efforts such as cutting interest rates to stimulate the economy to counter weakness, rather than focusing on reducing inflation.
The question is how far Powell will go into dovishness.
Economists at Citigroup said in a note on Wednesday that the mere mention of Wednesday’s big payrolls revisions would suggest that a half-point cut could be on the table at the September meeting. Economists expect the bank to cut by half-points at its September and November meetings.
Goldman Sachs economists expect Powell to express “a little more confidence in the inflation outlook” and possibly say that officials are paying close attention to labor market data while suggesting that the Fed is “well positioned to support the economy if needed.”
Such comments would reinforce a September cut, Goldman Sachs economists said in a note earlier this week, but they would remain open-ended on the size of the rate cut until the August jobs report, due on Sept. 6.
While they do not expect Powell to say anything to suggest that the current interest rate level is “inappropriate in light of the progress made on inflation,” if he did, it would increase the odds of a larger cut in September and strengthen the case for further cuts at future meetings.
Powell, however, won’t be the only Fed official in Jackson Hole. Several other key figures from the central bank, including Kansas City Fed President Jeffrey Schmid and Atlanta Fed President Raphael Bostic, will be there for impromptu media interviews, which could provide more color on Powell’s economic outlook.
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