THESE days, central bank celebrities from around the world gather in the US Midwest, and this time, it is very important what the first among equals has to say.
It's that special time of the year again when the yearly symposium for central bankers in Jackson Hole, Wyoming, takes place from August 22 to 24. The event represents something that is almost secretive, as only one speech is given to the public, the opening remarks from Jerome Powell, chairman of the US central bank, also known as "the Fed."
This keynote speech is always delivered on Friday morning at 8 a.m. local time, which is 10 a.m. on Wall Street, though the rest of the world is already well into the weekend. This year, the speech is truly important for the global financial markets and investors. The Fed is expected to start cutting interest rates next month at its next monetary policy meeting on September 18.
The timing is special, maybe even tense, as seen from the financial markets' perspective. One main reason is that US interest rates are currently at a multiple-year high. The turning point is now, and the Fed has a tradition of moving fast when they change the cycle, like moving into a new rate-cut cycle.
I am very certain that investors will study each word in Powell's speech because the US is not "just" entering a rate-cut cycle; the American economy is also on the brink of a recession or, at the very least, sliding in that direction. What would Powell say about that?
Since last year, the central bank has given guidance that during this second half of the year, the economy and the financial markets would cheer rate cuts. This won't change, but the question is whether Powell would comment on the weak signals that are emerging left and right about the economy, or is a hint about a 50-basis-point rate cut in September an option? Whatever it is, his comments could rock financial markets around the world, especially when markets open the following Monday morning.
Whether the direction is a 25- or a 50-basis-point rate cut, the speech could easily cover some of the lower-pointing economic data. Very important is the inflation figure, which has moved down to 2.9 percent in July, the lowest recorded since 2021. I would argue that the Fed is pragmatic about inflation — meaning that as long as the direction is right and the risk of a turnaround is getting smaller, then the current level is not a concern.
From just a few months ago, labor market data have indicated a slightly faster pace of slowing down in the economy than had been anticipated. This week, revised data show that in March, there were 818,000 fewer people employed in the US than was expected. This indicates that the headwinds had been stronger earlier than most investors had anticipated, and maybe also by the Fed itself. Business segments that surprised on the downside, for example, were services for businesses, or leisure for private consumers. Typically, these business areas are where people scale back if they feel a need to save money.
A 25-basis-point cut in September is what many market participants are expecting. This will not move the financial markets a lot, but if Powell includes some of the above observations, then I expect investors to become more nervous, which could lead to an immediate downward correction in the stock markets. If Powell walks down this alley but intensifies the move by indicating a 50-basis-point rate cut due to an imminent economic slowdown, then it could roil the stock markets.
On one side, a bigger rate cut should be positive for the global stock markets, but if the reason is a weaker US economic outlook than had been expected, then it's my clear expectation that the reaction would be negative among investors.
There is also another reason why a 50-basis-point rate cut could be in the cards when Powell delivers his speech. Minutes show that at the Fed's July meeting, some monetary policy committee members had already argued for a rate cut as early as then. If that had happened, then a second cut would have been very likely in September. These committee members might argue that the Fed is now behind schedule, and therefore needs to make a 50-basis-point cut in September. I am not ruling out this outcome.
This week, I argue that a 50-basis-point rate cut has become a more likely possibility in September. If Powell hints at such a move, then investor reaction will depend on the detailed wording of his speech. If he hints at more economic headwinds than expected, then investors will react negatively. If the Fed chairman gives cues that the Fed will speed up the rate cuts because they normally move fast when entering new cycles, then the financial markets will cheer this kind of wording. It is truly exciting.
Peter Lundgreen is the founding CEO of Lundgreen's Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.
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