Markets are in a holding pattern ahead of the Jackson Hole Symposium. It’s often the venue for the Fed announcing a shift in monetary policy, and there are high expectations going into the event. But, there is also a high risk of a surprise, as the market and the Fed might be at odds.
The main event will be Fed Chair Jerome Powell’s speech late on Friday, with markets looking for comments that could shape rate cut expectations. Futures are pricing in around an 80% chance of a rate cut in September, with a similar chance of another cut by December. Traders will be looking for confirmation of those expectations.
The Uncertainty Around the Fed
Markets are uneasy about what might come out of Jackson Hole because of the significant shift in expectations since the last meeting. After the FOMC meeting on July 31, Powell justified the decision to hold rates unchanged on a strong economy and resilient labour market. But just two days later, the NFP report came in weaker than expected, well below analysts’ estimates. The job numbers for June and May were also cut, so that in total only 13K positions were recorded in that period. This led to rampant speculation that the Fed would shift to easing.
But, since then, CPI has risen, and PPI has shown that there is persistent inflation pressure amid wholesale prices. On Wednesday, the FOMC minutes came out with a more hawkish tone. They showed that the governors at the Fed were aware of a weakening job market, but decided to cut anyway. The minutes left the impression that the Fed is more concerned about the potential for inflation from tariffs than weakness in the jobs market.
Factors Affecting the Fed’s Outlook
There is a strong division within the Fed around monetary policy. That led to the highest number of dissenters at the last meeting since 1993. Of course, the Fed is also under pressure from US President Donald Trump, who wants lower interest rates. He will appoint a new temporary member to replace Governor Adriana Kugler, but it is unlikely that this will happen before the September meeting. Another Governor, Lisa Cook, has been accused of committing mortgage fraud, with the Trump Administration calling for her resignation. All of that could weigh on the analysis of what Fed officials say this weekend.
The issue revolves around the Fed’s dual mandate of maintaining price stability and full employment. Those in favour of keeping rates high argue that tariffs will raise consumer prices, so it’s not the time to lower rates. But higher rates would restrict economic growth and weaken the job market. Those in favour of cutting now have argued that tariff-induced inflation is temporary, and the Fed needs to prevent the labour market from deteriorating further.
What to Look Out For
The market reaction will likely hinge on what aspects Powell focuses on in his speech. If he talks about inflation, tariffs, and doesn’t seem concerned about the latest NFP figures, then the market would see that as hawkish. Depending on the degree of emphasis, the market might go so far as to price out a rate cut in September, and pin its hopes on October.
On the other hand, if Powell acknowledges deterioration in the jobs market or de-emphasises short-term concerns around inflation, then the market could move to fully price in the September rate cut. The effect might be more pronounced on gold, given its function as a store of value and hedge against inflation. Dovishness from Powell would likely signal more upside for the yellow metal.