- Fed officials are preparing to meet for their annual economic symposium in Jackson Hole, Wyoming, this week.
- All eyes will be on Fed Chairman Jerome Powell’s keynote speech on Friday.
- Investors will be watching closely for clues as to when and how much the Fed plans to cut interest rates in 2024.
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As the economy regains its footing after a volatile few weeks, all eyes are on Federal Reserve Chairman Jerome Powell’s upcoming speech at the annual economic symposium.
Source: Investing.com
With the Fed slowing to its lowest level since 2021 and robust economic data, investors are eagerly awaiting clues from the Fed chairman on the direction of interest rates, particularly the likelihood of a rate cut at the September FOMC meeting.
Powell’s highly anticipated keynote speech is scheduled to be delivered at 10 a.m. EST on Friday, and he will likely send signals that the central bank is ready to gradually cut interest rates starting next month. As confidence grows in a “soft landing” for the economy, the big question for investors right now is not whether the Fed will cut rates, but rather by how much and how quickly.
As of Wednesday morning, markets were expecting a 69 percent chance that the Fed would cut rates by 25 basis points by the end of September, and a 31 percent chance that there would be an even deeper cut of 50 basis points, according to Investing.com. A week ago, the odds of a more significant cut were higher, reflecting evolving expectations about the Fed’s next move.
Source: Investing.com
Overall, the market is currently expecting an interest rate cut of almost 100 basis points by the end of the year, which would bring the key interest rate back down to 4.25%.
The balancing act of the Fed’s dual mandate
Given the Fed’s dual mandate to ensure price stability and maximize employment, Powell’s speech at Jackson Hole could signal a long-awaited shift in focus. While inflation has been the primary concern in recent years, the recent cooling trend and a slowing labor market suggest that unemployment may now be the focus.
As shown below, US inflation rose to 4.3% in July, the highest since October 2021, while headline CPI fell to 2.9%, the lowest since March 2021.
Source: Investing.com
Source: Investing.com
Rising unemployment and growing evidence that inflation is under control could push the Fed to support employment, potentially leading to looser monetary policy. Therefore, the upcoming US jobs report on September 6 will be particularly important, as surprises in this data could significantly affect the Fed’s decision-making process.
A strong employment report that reverses July’s weakness could boost confidence that risks to growth have abated, while another weak report could reignite concerns about the economy.
Impact on the market
Powell’s speeches are known to have a major impact on financial markets, and this one is no exception. If he signals that the expected rate cuts may be less drastic than investors currently expect, it could trigger a strengthening of rates and a rally, as well as a possible sell-off in equity markets.
On the other hand, if Powell matches market expectations and strikes a dovish tone, the S&P 500 and tech-heavy stocks could rise sharply, while the US dollar and US Treasury yields would likely continue their downward trend, which would also mean extending their record-breaking run to new all-time highs.
Source: Investing.com
Equity markets have been particularly volatile, with recent sell-offs due to heightened recession risks in the US, followed by a recovery driven by the easing of those fears. The blue chip is back above 40,000 points and the S&P 500 is again approaching record highs, led by a strong rally in technology stocks.
However, concerns about US growth remain and Powell’s speech could either fuel further gains or trigger a rapid sell-off, depending on the signals he sends.
Trading Strategies for Jackson Hole
As the market awaits Powell’s comments, there is a lot at stake. With high volatility expected around the Jackson Hole Symposium, traders should prepare for potential market swings. Current market sentiment already reflects expectations of lower interest rates in the long term, as evidenced by recent weakness in the USD and moves in 10-year US Treasury yields. However, any deviation from these expectations in Powell’s comments could reverse this trend.
Investors and traders will be listening closely to his words and ready to adjust their strategies based on the direction he sets for US monetary policy.
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Source: InvestingPro
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Announcement: At the time of writing, I am long the S&P 500 through the SPDR® S&P 500 ETF and the Invesco QQQ Trust ETF. I am also long the Technology Select Sector SPDR ETF (NYSE:).
I regularly adjust my portfolio of individual stocks and ETFs, continuously assessing both the macroeconomic environment and the financial data of companies with risks.
The views discussed in this article represent solely the opinion of the author and should not be construed as investment advice.
Follow Jesse Cohen on X/Twitter @JesseCohenInv for further stock market analysis and insights.
