From August 21st to 23rd, global investors' attention will be focused on Jackson Hole, a mountain resort in Wyoming. Federal Reserve Chairman Jerome Powell's speech will not only provide key clues about the future path of US monetary policy but also potentially become a defining moment in his career, safeguarding the Fed's independence. The market is waiting with bated breath. Investors widely expect the Fed to cut interest rates in the coming weeks, a prospect that has driven the stock market, particularly interest-rate-sensitive sectors, to record highs. Any signal that contradicts this expectation could trigger significant market volatility. Powell's speech will be one of the most anticipated central bank events of the year, requiring him to reassure the market while providing a solid economic rationale for the Fed's decisions. The speech carries immense political pressure. The Trump administration has intensified its criticism of Powell's failure to cut interest rates and is even scouting for a possible replacement. This has put Powell's every public statement under the spotlight, and the Jackson Hole symposium is the perfect platform for him to articulate his stance and emphasize central bank independence. Powell faces a daunting economic dilemma. On the one hand, the Trump administration's tariff policy is driving up inflation, complicating the decision to cut interest rates. On the other hand, the labor market has shown signs of cooling, raising the risk of slowing economic growth. Caught between conflicting economic signals and ongoing political interference, Powell is treading a delicate line at every turn. The Risk of a Hawkish Surprise: Wall Street is already positioning itself for a rate cut. Data from the federal funds futures market indicates a greater than 92% probability of a 25 basis point rate cut at the Fed's September meeting, with at least one more cut expected this year. This dovish outlook has already translated into market action. Sectors sensitive to borrowing costs have been big winners recently. Shares of leading homebuilders such as PulteGroup, Lennar, and D.R. Horton have risen between 4.2% and 8.8% over the past week, far outpacing the S&P 500's 1% gain. "It's all about homebuilders, cyclicals, industrials, and materials companies," said Andrew Slimmon of Morgan Stanley Asset Management. However, these gains have also left the market vulnerable. Slimmon added that the strong rebound in homebuilders suggests the market is confident that the Federal Reserve will cut interest rates, so "any signal from Jackson Hole suggesting otherwise would make the market more vulnerable to a sell-off." IBKR market strategist Steven Sosnick also warned: "What if people are expecting a dovish Powell, but he turns out to be hawkish with all his might? The more complacent we are heading into this meeting, the greater the risk of a volatile market reaction." A Difficult Decision Under Political Pressure Powell's cautious approach stands in stark contrast to the Trump administration's eagerness. President Trump has not only publicly called Powell a "stubborn fool" and accused him of being "too late," but has also hinted at the possibility of firing him before his term ends. The White House is already screening potential replacements, focusing on candidates willing to cut interest rates quickly. This political interference makes the Fed's decision-making process extremely difficult. Powell has maintained the federal funds rate in the 4.25%-4.50% range primarily due to concerns that Trump's tariffs could exacerbate inflation. Similar political interventions have historically led to disastrous consequences. In the 1970s, pressure from the Nixon administration led then-Federal Reserve Chairman Arthur Burns to maintain low interest rates despite rising inflation, ultimately triggering double-digit inflation. Powell frankly acknowledged that tariffs "could lead to higher inflation, slower economic growth, and increased unemployment," complicating any Fed decision. A premature rate cut could fuel inflation, while maintaining interest rates could exacerbate labor market weakness. Mixed Economic Data The current complex economic data has fueled this debate. While the US economy has largely avoided a recession, achieving a sort of "soft landing," the path forward is uncertain. On the one hand, inflationary pressures remain stubbornly stubborn. The core Consumer Price Index (CPI) rose 0.3% month-over-month in July, the largest increase since January, bringing the annual rate to 3.1%. The Producer Price Index (PPI), a measure of wholesale inflation, surged 0.9% last month, the largest monthly increase in more than three years. These data suggest that tariffs may have begun to raise costs for businesses, ultimately passing on the impact to consumers. Meanwhile, the labor market is cooling. The US added only 73,000 jobs in July, while employment figures for May and June were revised downward by over 250,000. Wage growth has slowed to an annual rate of around 3.9% from a projected 6% in 2022. These data have also divided the FOMC, with two members having voted for a rate cut at the July meeting. A Battle to Defend the Legacy of Independence Faced with this complex situation, Powell is not expected to preview the September interest rate decision at Jackson Hole. Instead, his speech will focus on the Fed's five-year review of its monetary policy framework. This is seen as a key strategy for him to defend the Fed's long-term independence. By adjusting the policy framework, Powell can establish guiding principles that will transcend his tenure, such as how to respond to supply shocks and how to rebalance the two major tasks of full employment and price stability. William English, a professor at the Yale School of Management and a former senior Fed official, predicts that the Fed may return to using "deviations" rather than "shortfalls" to describe employment conditions. This slight semantic change means that both overheated and overcooled labor markets are problems that need to be addressed, giving the Fed equal reason to raise or cut interest rates in different situations.
RSM US chief economist Joe Brusuelas said:
"My sense is that he sees his legacy as maintaining the independence of the Federal Reserve."
The Jackson Hole speech will not put an end to this battle, but it will show how Powell will balance the triple role of managing a transitioning economy, dealing with political hostility and refining the decision-making framework. This is not just about an interest rate decision, but about whether the U.S. central bank can maintain its ability to breathe independently in the storm.
Catherine
Weatherly
Alex
Kikyo
Anais
Miyuki
Weiliang
Joy