Federal Reserve Chair Jerome Powell’s Upcoming Speech

Federal Reserve Chair Jerome Powell is scheduled to speak at 10 AM on Friday at the Jackson Hole Symposium. He is expected to hint at a widely anticipated rate cut at the September FOMC meeting. This comes after last week’s core CPI data recorded a 0.165% month-over-month increase, marking the third consecutive reading at or below a 2% annualized rate.

However, the question is no longer whether the Fed will initiate a rate-cutting cycle, but rather how rapidly and significantly it will unfold, according to Citi economists in a recent note.

“We continue to see economic risks as tilted toward a more significant weakening in labor markets and the broader economy and dovish Fed policy risk as underappreciated by markets,” they wrote.

Citi projects 50bp rate cuts in both September and November but expects Powell to avoid committing to specific policy decisions, reiterating that these decisions are “data dependent.”

A key aspect of Powell’s speech will likely be how he addresses the shift in risks, with concerns about the labor market now taking precedence as inflationary pressures ease. At the July 31st FOMC meeting, even before the unemployment rate rose to 4.3% and core inflation remained subdued, Powell began highlighting that the balance of risks was shifting from price stability to employment.

The latest data, showing cooling inflation and a faster-than-expected softening of the labor market, provides Powell with two potential justifications for a more aggressive pace of rate cuts, note Citi economists:

1. Real Policy Rate Adjustment: As inflation decreases, the real policy rate rises, necessitating a reduction in nominal rates to avoid overly restrictive conditions.
2. Labor Market’s Rapid Loosening: The quicker loosening of the labor market could justify bringing policy rates back toward neutral sooner.

Despite stronger-than-expected retail sales and a decline in initial jobless claims, Powell is likely to maintain that the U.S. economy will avoid a recession. However, as Citi economists emphasize, with the ‘Sahm rule’ nearly triggered, Powell’s previous concerns about downside risks to employment should now be stronger.

They believe Powell may use his Jackson Hole speech to reinforce that policy is “well positioned” to respond to evolving data, potentially signaling considerable scope for rate reductions.

“While he will stop short of clearly guiding toward or away from 50bp cuts, he will leave them on the table,” the economists continued.

The speech may also set the stage for larger rate cuts, framing them within a clear macroeconomic rationale to avoid perceptions of “panic.”