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Author: Zhang Yaqi, Wall Street News
From August 21 to 23, global investors will focus on Jackson Hole, a mountain resort in Wyoming, USA.Here, the speech of Fed Chairman Jerome Powell will not only provide key clues to the future monetary policy path of the United States, but may also become a key battle to define its career and defend the independence of the Federal Reserve.
The market is waiting for breath.Investors generally expect the Fed to cut interest rates in the coming weeks, an expectation that the Fed will cut interest rates in the coming weeks has driven stock markets, especially interest rate-sensitive sectors, to hit record highs.And any signal that goes against this expectation could trigger violent market turmoil.Powell’s speech will be one of the most watched central bank activities of the year, and he needs to provide solid economic evidence for the Fed’s decision-making while appeaseing the market.
Behind the speech is huge political pressure.The Trump administration’s criticism of Powell’s failure to cut interest rates is becoming increasingly fierce, and it is even looking for candidates who may be replaced.This puts Powell’s every public statement in the spotlight, and the Jackson Hall annual meeting is the best stage for him to clarify his position and emphasize the independence of the central bank.
Powell faces a tough economic hardship.On the one hand, the Trump administration’s tariff policies are pushing up inflation, complicating the decision to cut interest rates; on the other hand, the labor market has shown signs of cooling, and the risk of slowing economic growth cannot be ignored.Between conflicting economic signals and ongoing political intervention, Powell’s every step was on thin ice.
The risk of hawkish accidents
Wall Street is ready for a rate cut.Data from the federal funds rate futures market shows that the market believes that the probability of the Federal Reserve cutting interest rates by 25 basis points at its September meeting is more than 92%, and it is expected that there will be at least one interest rate cut this year.
This dove expectation has been translated into a practical action of the market.Industry sensitive to borrowing costs has become the big winners in the near future.Shares of leading residential builders such as PulteGroup, Lennar and D.R. Horton rose 4.2% to 8.8% in the past week, far exceeding the 1% increase of the S&P 500.Andrew Slimmon of Morgan Stanley Asset Management said:
“It’s all about residential builders, cyclical stocks, industrial and material companies.”
However, these gains also make the market extremely vulnerable.Slimmon added that the strong rebound from home builders showed markets’ strong belief that the Fed would cut interest rates, so “any signal that was not the case at Jackson Hall would make the market more vulnerable to the sell-off.”IBKR’s market strategist Steven Sosnick also warned:
“What if people are expecting a dove Powell and he shows a hawkish stance with firepower? The more complacent we feel when we enter this meeting, the greater the risk of market volatility reactions.”
Hard choices under political pressure
Powell’s cautious attitude is in stark contrast to the Trump administration’s eagerness.President Trump not only publicly called Powell a “stubborn fool” and accused him of being “too late”, but also suggested that he might fire him before the end of his term.The White House is already screening potential replacements, focusing on candidates willing to cut interest rates quickly.
This kind of political intervention makes decisions extremely difficult for the Federal Reserve.The reason why Powell still maintains the federal funds rate in the range of 4.25%-4.50% is mainly because he is worried that Trump’s tariff policy may exacerbate inflation.Historically, similar political interventions have had disastrous consequences.In the 1970s, pressure from the Nixon administration caused then-Federal Chairman Arthur Burns to maintain low interest rates as inflation rose, eventually triggering double-digit inflation.
Powell admitted that tariffs “could lead to higher inflation, slowing economic growth and increased unemployment,” which makes any decisions made by the Federal Reserve more complicated.If interest rates are cut too early, it may fuel inflation; if interest rates are kept unchanged, it may exacerbate weakness in the job market.
Mixed economic data
The current complex economic data adds fuel to the debate.Although the U.S. economy largely avoided recession and achieved some form of “soft landing”, the road ahead is full of uncertainty.
On the one hand, inflation pressure remains stubborn.The core consumer price index (CPI) rose 0.3% month-on-month in July, the largest increase since January, with an annual rate of 3.1%.The Producer Price Index (PPI), which measures wholesale inflation, soared 0.9% last month, the largest monthly increase in more than three years.These data suggest that tariffs may have begun to drive up corporate costs and eventually spread to consumers.
On the other hand, the labor market is cooling down.In July, the United States added only 73,000 new jobs, while employment data for May and June were significantly revised down by more than 250,000.Wage growth has slowed to about 3.9% from an annual rate of 6% in 2022.These data also led to differences within the FOMC, with two directors voting to support the rate cut at their July meeting.
The battle of legacy to defend independence
Faced with a complicated situation, Powell is not expected to disclose the September interest rate decision in Jackson Hall in advance.Instead, his speech will focus on the Fed’s assessment of the monetary policy framework every five years.This is seen as his key strategy for defending the Fed’s long-term independence.
By adjusting the policy framework, Powell could establish some guiding principles that could exceed his term, such as how to deal with supply shocks and how to rebalance the two tasks of full employment and price stability.William English, a professor at Yale School of Management and a former senior Fed official, predicted that the Fed may re-use “deviations” rather than “shortfalls” to describe employment, a slight semantic change that means both overheating and supercooling labor markets are issues that need to be solved, giving the Fed the same reason to raise or cut rates under different circumstances.
Joe Brusuelas, chief economist at RSM US, said:
“My feeling is that he sees his legacy as maintaining the independence of the Fed.”
Jackson Hall’s speech will not end the battle, but it will show how Powell balances the triple role of managing economics in transformation, responding to political hostility and improving the decision-making framework.This is not only about an interest rate decision, but also about whether the U.S. central bank can maintain its independent breathing during the storm.
