The world is focusing on this meeting next week, what will Powell say?

As the panic of the US economic recession gradually dissipates, global central banks stand at a crossroads in monetary policy, with the financial markets focusing on the upcoming Jackson Hole Global Central Bank Annual Meeting next week.

As one of the most important central bank meetings globally, this year's Jackson Hole Global Central Bank Annual Meeting is scheduled to be held from August 22nd to 24th under the theme of "Reassessing the Effectiveness and Transmission Mechanism of Monetary Policy." Participants including the Federal Reserve and other major central banks, top economists, will gather at the Jackson Lake Lodge in Grand Teton National Park, Wyoming, USA, to discuss the most pressing issues in the global economy and monetary policy.

In recent years, the Jackson Hole conference has not only been a platform for policymakers and economists to exchange ideas but has also become a barometer for the Federal Reserve's monetary policy. This year, the market will closely watch every word spoken by Jerome Powell at this high-profile meeting, analyzing his views on the labor market and inflation to assess the direction of US monetary policy.

Analysts such as Mark Cabana from Bank of America Merrill Lynch pointed out in a research report on Thursday that at this global central bank meeting, if Powell takes a more resolute stance on preventing weakness in the labor market, this will be seen as an important policy signal. In other words, the Federal Reserve will not wait until the labor market shows signs of weakness before reacting but will take measures to prevent it when such risks are foreseen, demonstrating a more proactive and preventative monetary policy stance.

At the July FOMC meeting, Powell hinted at a rate cut in September as risks to achieving employment and inflation goals continued to balance with cooling labor market and declining inflation rates.

Bank of America Merrill Lynch also believes that Powell may refer to the June Summary of Economic Projections and mention the committee's gradual unwinding of policy accommodation to balance risks in an uncertain outlook. This statement is crucial, as Bank of America Merrill Lynch wrote:

The start of the easing cycle may be seen as a victory over inflation—although the Fed will not say so publicly—and represents a shift towards maintaining labor market stability.

If 2022 is about "determination" at the global central bank meetings, 2023 is about "data dependency," then 2024 may be about "maintaining labor market stability."

After all, the Fed's definition of a soft landing is to bring inflation back to target levels without deteriorating labor market conditions. The inflation battle may not be completely won, but it may have been won enough, with the focus now on preventing unexpected weakness in the labor market.

According to the schedule released by the Federal Reserve on Thursday, Powell will deliver a keynote speech at the Jackson Hole Annual Meeting at 10 a.m. Eastern Time on August 23rd (10 p.m. Beijing Time on August 23rd).

At the 2022 global central bank meeting, Powell emphasized the necessity of restoring price stability and expressed determination to combat inflation, which was seen as a signal of his commitment to see this fight through to the end, a tough stance that the market interpreted as Powell's "Volcker moment." This time, as global monetary policy reaches a turning point, will Powell once again create significant waves?

How will the market respond?

According to a research report from Bank of America Merrill Lynch, historically, US interest rates have risen before the Jackson Hole meeting, fallen slightly in the days following the meeting, and then rebounded significantly during the September rate meeting. The US Treasury yield curve typically flattens moderately after the meeting, but steepens moderately within 10 days after the meeting. In the 10 days before and after the meeting, the US dollar usually fluctuates within a range of 0.5%.

Bank of America Merrill Lynch emphasizes that if Powell does not signal a rate cut at the September meeting, or implies that there will not be a significant rate cut, the US Treasury yield curve is expected to experience a significant bear market or flatten.

Jackson Hole is not expected to have a significant impact on the US dollar. Bank of America Merrill Lynch points out that the market has already priced in rate cuts by the Fed this year, causing the US dollar to weaken, especially after the July labor market data came in below expectations. Inflation has been slowly moving towards the central bank's target, providing room for the Fed to start a dovish cycle, although not necessarily at the rapid pace priced in by the market