Powell listens to advice: the more you say, the more mistakes you make!
Powell may take a cautious stance at the Jackson Hole meeting, avoiding giving too much guidance as the market has already priced in the expectation of a 50 basis point rate cut before the end of the year. Despite recent U.S. economic data not supporting a significant rate cut, the market still expects the Fed to cut rates by a total of 100 basis points in future meetings. Powell may reiterate the policy of decision-making based on data and focus on PCE inflation data, with limited short-term impact on the U.S. dollar
In the process of communication between the central bank and the market, "less talk" is often better than "more talk".
The market has fully digested the expectation of at least a 50 basis point rate cut by the Fed by the end of the year, which may prompt Powell to avoid giving strong guidance at the Jackson Hole meeting today. The dollar may get a boost from this, but the impact should be temporary. Bank of England Governor Bailey's speech may provide even less guidance.
Fed Chair Powell may use this speech to prepare the market for a rate cut in September. With the help of speeches from several Fed officials and meeting minutes, a rate cut in September has already been fully priced in. The question is whether Powell will open the door to a 50 basis point rate cut, if not in September, then at least later this year.
The latest batch of US data does not firmly support a 50 basis point rate cut by the Fed in September, and most FOMC members in recent public speeches seem to be subtly pushing back against the market's expectation. Yesterday, the US services PMI was stronger than expected, offsetting the decline in manufacturing, while initial jobless claims rose slightly to 232,000, continuing jobless claims were lower than expected, and last week's data was revised down. The latest non-farm payroll revision released earlier this week showed that the US job market is weaker than previous data, but other economic activity and employment indicators have not shown warning signals.
These data should allow Powell to maintain relatively balanced communication in today's speech.
From the market pricing perspective, there may not be much momentum at the moment to open the door to a 50 basis point rate cut. The market expects the Fed to cut rates by a total of 100 basis points over the next three meetings. This pricing seems too aggressive, and if Powell hints at a 50 basis point cut, it could push the federal funds rate futures curve to uncomfortably low levels for the Fed.
Powell is more likely to re-emphasize the focus on the dual mandate, reiterate the reliance on data for decisions, and guide market expectations for a larger rate cut only after the September non-farm payroll data is released. Of course, this is contingent on no major surprises or shocks in PCE inflation data.
ING International from the Netherlands believes that there is a slight upside risk for the dollar today. Nevertheless, the bank still expects Powell's speech to have no long-term impact on the foreign exchange market, maintaining a bearish view on the dollar in the short term, as the rebuilding of speculative positions still seems more likely to favor dollar shorts after recent rebalancing.
Bank of England Governor Bailey will also speak at the Jackson Hole Symposium at 23:00 Beijing time. ING International from the Netherlands believes that he may also follow Powell's approach and speak as little as possible. Bailey does not need to address aggressive dovish pricing, but the UK still needs more confidence in inflation.
Bailey's speech is likely to be irrelevant for the pound. Due to the growth differences between the Eurozone and the UK, the euro against the pound has returned below 0.8500, but considering the interest rate differential trend, ING International from the Netherlands remains cautious about chasing the currency pair lower and expects it to rebound to 0.8550-0.8600 in the coming weeks.