Note: Investor's Business Daily is live-blogging Fed Chairman Jerome Powell's Jackson Hole speech at this link.
This time last year, Federal Reserve Chairman Jerome Powell used the annual Jackson Hole, Wyo., monetary policy conference to set the stage for the start of rate cuts at the next meeting. "The time has come for policy to adjust," he said, warning of downside risks to employment and fueling a 1.1% S&P 500 rally.
Compared to last year, the job market looks a whole lot worse in many respects. That has Wall Street focused on whether Powell will use this year's Jackson Hole speech on Friday morning at 10 a.m. ET to telegraph a resumption of Fed rate cuts at next month's policy meeting and perhaps hint at further cuts beyond that.
Yet we can be confident what Powell will say based on the clear markers he laid out in his news conference following the July 30 Fed meeting. Bottom line: The S&P 500 probably won't love it, because Powell isn't going to seal the deal for a September easing, but he likely won't push back against market expectations for a rate cut.
Jobs Data Shift Jackson Hole Expectations
If you look at monthly payroll gains, the labor market has downshifted in a big way relative to last year that might be expected to set off alarm bells at the Fed.
Last year's July jobs report showed a 114,000 monthly increase in nonfarm payrolls. That was a step down from the prior trend, lowering the average monthly gain to 170,000 in the three months through July 2024. Yet the monthly average payroll gain over the past three months is just 35,000. That follows shocking downward revisions to May and June payroll gains, which were slashed by a combined 258,000 to just 33,000.
Powell's Labor Market Take
So why won't Powell just go ahead and confirm that a cut is coming at the Sept. 17 Fed meeting? "The main number you have to look at now is the unemployment rate," Powell said on July 30.
Although the payroll revisions showed that net job gains have tanked over the past three months, the unemployment rate is so far holding steady at 4.2%.
"Because of immigration policy really, the flow into our labor forces is just a great deal slower," Powell said. As a result, what he called "the break-even number" — the number of new jobs needed each month to keep up with growth of the workforce and keep the unemployment rate from rising — has come down too.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote that "after accounting for deportations, the break-even monthly jobs number could be 50k or a little lower." He added that Chicago Fed President Austan Goolsbee has said much the same.
Even if the unemployment rate is steady at 4.2%, a level deemed roughly consistent with the Fed's full-employment mandate, Powell said that the decline in demand for workers "is suggestive of downside risk."
The Two Fed Mandates
The Fed is keeping monetary policy restrictive, meaning interest rates are high enough to weigh on economic growth. "Policy should be tight because tight policy brings inflation down," Powell said.
Powell isn't necessarily that worried about the long-term impact of Trump tariffs on inflation. But the Fed is managing the risk of too-high inflation against the risk of too-high unemployment. As of July 30, Powell said the risk of too-high inflation was the predominant risk, even as downside labor market risk was increasing.
When the two risks become "more in balance, that would imply that policy shouldn't be restrictive, it should be more neutral."
After a weak July jobs report, albeit with an essentially steady unemployment rate, and a pretty much status quo set of inflation reports, Powell is likely to say that the downside labor market risks have increased further, which implies a lower bar to rate cuts.
However, he'll stick to his data-dependent stance. The Fed will get the August jobs report and consumer and producer inflation readings before judging whether risks to the two Fed mandates, stable prices and full employment, are balanced enough to resume rate cuts.
Even if Powell is of a mind to resume rate cuts, there's a case to be made for him to slow-walk expectations at Jackson Hole. "Powell has little to gain by pushing the market further toward a September cut," Luzzetti wrote. "It may not take much of a push from Powell to get the market to contemplate a 50 (basis point) reduction."
Fed Rate-Cut Odds
As of Thursday evening, markets are pricing in 75% odds of a quarter-point rate cut at the Sept. 17 Fed meeting, with 15% odds of no cut, according to CME Group's FedWatch tool. A week earlier, investors saw over a 90% chance of a cut.
Over the year's final three Fed meeting, markets see 75% odds of at least a half-point in rate cuts, with 25% odds of 75 basis points in cuts. Just over a week ago, investors slightly leaned toward 75 basis points.
