Here’s everything to expect from Fed Chairman Powell’s speech Friday in Jackson Hole

Despite all the attention paid to Federal Reserve Chairman Jerome Powell’s policy speech on Friday, it seems unlikely that it will contain any headline-grabbing news.

After all, the market has made a decision: the Fed will start cutting rates in September – and will likely continue to do so through the end of the year and into 2025.

While there are still some questions about the size and frequency of the reductions, Powell should now provide a brief overview of the state of play and limited guidance on what lies ahead.

“Stop me if you’ve heard this before: They’re still dependent on data,” said Lou Crandall, a former Fed official and now chief economist at Wrightson-ICAP, a dealer-broker where he has worked for more than four decades. He expects Powell “will be unequivocal, but details on how soon and exactly when will depend on the data between now and the meeting.” There is no doubt that they will start making cuts in September.”

The speech will be delivered at 10 a.m. ET at the Fed’s annual conclave of global central bankers in Jackson Hole, Wyoming. The conference is titled “Reassessing Monetary Policy Effectiveness and Transmission” and runs through Saturday.

If there were any doubts about the Fed’s intentions to make at least a quarter-percentage point cut at the Sept. 17-18 Open Market Committee meeting, they were put aside Wednesday. The minutes of the July session showed that a “large majority” of members were in favor of a cut in September, barring any surprises.

Philadelphia Fed President Patrick Harker made this point even clearer Thursday when he told CNBC that we should start a process to cut rates in September.

An important question is whether the first reduction in more than four years will amount to a quarter or half a point, a subject that Harker does not want to commit to. The markets are betting on a quarter, but leave a 1 in 4 chance in a half, according to figures from the CME Group. FedWatch.

A half-point increase would likely require a substantial deterioration in economic data between now and then, especially another weak nonfarm payrolls report in two weeks.

“Even though I think the Fed’s base case is that they move a quarter, and my base case is that they move a quarter, I don’t think they’re going to feel the need to provide any guidance on that at this point,” said Crandall.

In previous years, Powell has used the Jackson Hole speech to outline broad policy initiatives and provide clues about the future of policy.

In his first appearance, in 2018, he outlined his views on interest rate and unemployment rates being considered ‘neutral’ or stable. A year later he indicated that interest rate cuts were on the way. In a speech amid racial protests in 2020, Powell unveiled a new approach that would allow inflation to run hotter than normal, without raising rates, in the interest of fostering a more inclusive labor market. However, this “flexible average inflation target” would precede a period of rising prices – leaving Powell to navigate a delicate minefield of policy over the next three years.

This time the task will be to confirm the market’s expectations while reflecting its impressions of the economy, and in particular the moderation of inflationary pressures and some concerns about the labor market.

“For us, the key will be Chairman Powell’s tone, which is expected to be dovish toward lower interest rates,” Jack Janasiewicz, portfolio strategist at Natixis Investment Managers Solutions, said in written comments. “Simply put, inflation continues to move towards the 2% target, seemingly at a pace that exceeds consensus. Combine this with signs that the labor market is softening and you get the sense that there is little reason to take an aggressive stance.”

The Fed has maintained its key interest rate for the past thirteen months, following a series of aggressive rate hikes. Markets have generally done well under the higher interest rate regime, but briefly rallied after the July meeting following signs of a deteriorating labor picture and a weakening manufacturing sector.

Powell is expected to at least give a nod to some economic headwinds, as well as the progress the Fed has made in its fight against inflation.

“We expect Powell to express somewhat more confidence in the inflation outlook and place somewhat more emphasis on downside risks in the labor market than at his press conference after the July FOMC meeting, in light of data released since then,” Goldman said . Sachs economist David Mericle said in a recent note.

Goldman is roughly at the consensus of market expectations: rate cuts at each of the next three meetings, followed by more easing in 2024, which will ultimately shave about 2 percentage points off the fed funds rate — a policy trajectory that will continue, in very general terms terms, by Powell in Jackson Hole.

Fed chairs claim not to be sensitive to moves in financial markets, but Powell has undoubtedly seen the reaction after the July meeting and will want to allay fears that the central bank will hold off before starting to ease rates.

“Powell tends to support the stock market,” said Komal Sr-Kumar, head of Sri-Kumar Global Strategies. “Time and time again he has indicated that interest rates will fall. They have not fallen, but this time he will.”