Investors Look to Powell Speech for Economic Clues

Lydia Boussour, senior economist at EY Parthenon, discusses what she's watching for from Fed chair Jerome Powell when he speaks from Jackson Hole, Wyoming on Friday morning. Boussour also breaks down the latest development in trade between the US and the EU and the impact of tariffs on the consumer.

Fed Chair Jerome Powell will deliver a hotly-anticipated speech Friday, and investors will be listening for any hints on what policymakers may do at their September policy meeting.

Other Fed officials speaking Wednesday and Thursday struck a similarly hawkish tone as Hammack. Atlanta Fed President Raphael Bostic said he still sees just one rate cut this year as appropriate. Jeffrey Schmid, president of the Kansas City Fed, said inflation risk still outweighs risks to the labor market.

Those comments echoed minutes of the central bank’s latest policy meeting in July, published on Wednesday, which showed most officials held the same view.

Read More: Fed Minutes Show Majority of FOMC Saw Inflation as Greater Risk

The Fed has held its benchmark rate steady this year on concerns that the Trump administration’s tariffs will stoke inflation. But concerns about the labor market are also building after the most recent jobs report revealed a substantial slowdown in hiring in the three months through July.

That report came out just after the Fed’s July 29-30 policy meeting, and may have shifted the Fed’s assessment of the balance of risks. But data on wholesale prices released last week also showed the biggest increase last month in three years, feeding concerns among those who are still worried about inflation.

US Treasuries fell for the first time in three days as traders pared bets on a September interest-rate cut ahead of the Federal Reserve’s gathering at Jackson Hole.

The yield on the 10-year benchmark rose four basis points to 4.33%. The two-year yield — which is more sensitive to changes in monetary policy — moved up to 3.79% Thursday afternoon in New York.

The selloff accelerated after Fed Bank of Cleveland President Beth Hammack said she wouldn’t support lowering rates if the meeting were tomorrow, citing inflation figures. Fed Chair Jerome Powell will deliver his remarks at the Jackson Hole, Wyoming, symposium on Friday morning.

“Powell may still guide toward cuts while sounding hawkish,” said Colin Graham, head of multi asset strategies at Robeco, in an interview. “We think the market is mispricing the probability of a cut.”

Interest-rate swaps show a roughly 70% chance of a quarter-point reduction at the Fed’s meeting in mid-September. A week ago the odds were above 90%.

Also Thursday, weekly jobless claims showed a bigger-than-expected increase in new filings while a separate report suggested manufacturing is expanding at the fastest rate in more than three years. And an auction of $8 billion of 30-year Treasury Inflation-Protected Securities drew a yield of 2.65%.

Fresh readings on the US labor market and inflation are due before the Fed’s decision on September 17. But investors will be monitoring Powell’s speech for evidence that could reinforce — or undo — wagers on rate cuts. Some have even pushed into wagers that benefit from an outsize, 50-basis-point reduction.

“The state of the US labor market is closely watched by the Federal Reserve, and by global markets,” said James Bilson, a fixed income strategist at Schroders. The firm thinks the chance of a so-called hard landing has increased to about 20%.

“We don’t see justification for a larger 50 basis points cut in September, but there is now scope for the Fed to reduce rates more quickly than they might have otherwise,” he added.

Final appearance

It will be the final time that Powell attends the Jackson Hole gathering in the capacity of Fed chair given his term expires next year. Powell has repeatedly stressed the need for caution in lower rates, an approach that’s incurred the wrath of President Donald Trump.

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