To The Moon

Jackson Hole Preview: Brace for a Potential Hawkish Surprise

The Spotlight Shifts to Grand Teton

This Friday, the global financial world will turn its attention to Jackson Hole, Wyoming, as Federal Reserve Chairman Jerome Powell delivers his highly anticipated speech at the annual central bank symposium. Historically a crucial platform for the Fed to signal its policy direction, this year's meeting carries extra weight. The market is on high alert for any clues that might greenlight a September rate cut. Currently, traders are betting on an 80% chance of a 25-basis-point reduction next month.

From Inflation to Employment: A Key Policy Pivot

The theme of this year's conference, "The Evolving Labor Market: Demographic, Productivity, and Macro Policy," might sound academic, but its message is crystal clear: with inflation under control, the Fed's focus is shifting back to jobs.

This pivot is critical. If the U.S. labor market is indeed showing cracks, any subtle change in the Fed's tone could dictate market movements for months to come. The meeting may also offer a glimpse into the results of the Fed's policy framework review. Several major investment banks predict that Powell may partially reverse the "Flexible Average Inflation Targeting" (FAIT) policy introduced in 2020, aiming to rebalance the Fed’s dual mandate of stable prices and maximum employment.

How Will Powell Read the Weak Job Data?

At 10:00 a.m. EDT on Friday, Powell will deliver his speech titled "Economic Outlook and Framework Review." Markets will be scrutinizing his comments on the signs of a weakening labor market from the July jobs report. The key question is whether this data is enough to convince the Fed to begin its rate-cutting cycle in September.

The July Non-Farm Payrolls report not only missed expectations but also saw significant downward revisions to the previous two months' data, which the Bureau of Labor Statistics described as "larger than normal." This has fueled market anxiety about the health of the job market. The subsequent mixed CPI data was seen as "not as hot as feared," further solidifying expectations for a September rate cut.

According to Goldman Sachs economist David Mericle, Powell might change his tone from the July FOMC press conference. Instead of stating that the committee is "well positioned" to wait for more data, he could signal the Fed's readiness to address risks to both parts of its dual mandate. By highlighting the downside risks in the July jobs report, Powell could hint at his willingness to support a rate cut if necessary.

A Major Policy Overhaul on the Horizon?

Jackson Hole has a history of marking policy turning points. In 2020, the FAIT framework was introduced here. Now, that same framework may be partially adjusted in 2025.

Goldman Sachs and Deutsche Bank both anticipate the Fed will modify the FAIT framework. Goldman suggests the Fed may revert to a more traditional "dual-deviation" employment target, while dropping the "average inflation" goal in favor of a "flexible inflation target." Deutsche Bank takes a more aggressive view, arguing that the 2020 changes were a key driver of the inflation overshoot. They expect Powell's speech to advocate for rescinding the 2020 modifications and restoring the role of preemptive policy adjustments.

If these predictions come true, the "Jackson Hole effect" could once again signal a major policy shift, injecting new uncertainty into the markets.

One Cut or Three? Wall Street Is Deeply Divided

Despite widespread expectations for a September rate cut, Wall Street is sharply divided on how many rate cuts to expect this year.

~Goldman Sachs holds a dovish stance, predicting three rate cuts this year. They argue that the significant slowdown in job growth and downward revisions necessitate decisive action from the Fed to prevent further labor market deterioration.

~Barclays is more cautious, believing market expectations for a September cut are too optimistic. Their baseline forecast points to the first rate cut occurring in December, noting that the latest jobs data doesn't entirely contradict Powell's previous statement about not being in a hurry to adjust rates.

~JPMorgan is taking a wait-and-see approach. Their market intelligence team suggests that the Jackson Hole meeting "may not have a material impact," as the September decision will ultimately depend on the September 5th non-farm payrolls and September 11th CPI data.

How to Navigate a Potential Hawkish Surprise

With the market largely pricing in a September rate cut, this certainty remains fragile until Powell speaks. The market is prone to overreact to any new details, even subtle ones, that could influence the rate path.

Morgan Stanley warns that the Fed's primary goal is to "keep its options open" and avoid being "held hostage" by fervent market expectations. As a result, Powell might use this conference to temper market enthusiasm. Barclays cautions that if Powell sounds hawkish, sectors that have seen the biggest gains from rate-cut expectations—such as small-cap stocks $Russell 2000 Index (.RUT.US)$ and homebuilders $D.R. Horton (DHI.US)$ $KB Home (KBH.US)$ $PulteGroup (PHM.US)$ —will be most vulnerable to a pullback.

In this uncertain environment, investors should remain data-dependent. After Jackson Hole, the August non-farm payrolls, CPI, and PPI reports are the next major hurdles that will ultimately decide the fate of a September rate cut. $S&P 500 Index (.SPX.US)$ $Nasdaq Composite Index (.IXIC.US)$ $Dow Jones Industrial Average (.DJI.US)$

Beyond Powell: Why NVIDIA's Earnings Matter More

While Jackson Hole is commanding the spotlight, for tech investors, next week's NVIDIA $NVIDIA (NVDA.US)$ earnings report may be even more critical. JPMorgan believes the recent tech stock pullback presents a buying opportunity, but they emphasize that their view would turn bearish if evidence of "stagflation" emerges. Ultimately, NVIDIA's earnings and its third-quarter guidance could have a more direct and lasting impact on the market.

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