Unsettled Jackson Hole: "The Door is Open for a Rate Cut, But No September Promise" [Fed Watch]

On the 22nd (local time) in Jackson Hole, Wyoming, USA, ahead of Fed Chair Jerome Powell's keynote speech at the symposium, the atmosphere at the venue was notably tense. The Jackson Hole Symposium is held annually in late August near the scenic Grand Teton National Park in Jackson Hole—an area celebrated as one of the most beautiful in the United States. As the event takes place in a resort lodge during peak vacation season, it's typically common to see central bank officials—who usually value formality—dressed more comfortably and mingling with participants. However, this year, the mood was clearly different.

A MarketWatch reporter, who has attended the Jackson Hole Symposium for four consecutive years as a correspondent, commented, "Compared to previous years, the overall atmosphere seems more subdued and slightly heavier," adding, "With increasing pressure from the White House, central bank officials seem to be minimizing contact with the media." An official from the Federal Reserve Bank of St. Louis, requesting anonymity, said, "It appears that the situation, with the White House and elected officials pressing Director Lisa Cook to resign over mortgage fraud allegations, is having an influence."

Christopher Waller, a Fed Board member mentioned as a candidate for the next Fed Chair, briefly met with a reporter at the event and said, "It's probably best to be reserved in my comments," before quickly moving on. Susan Collins, President of the Federal Reserve Bank of Boston, also said, "It's difficult to comment officially at this time. Let's talk later," as she left the scene.

The unsettled mood in the venue changed once again as Powell's keynote speech was delivered. This was because Powell's remarks included statements that completely dispelled some of the market's concerns about a hawkish message—concerns that had persisted until just the day before.

Powell stated, "The downside risk to employment is rising, and this could quickly materialize as a surge in layoffs and an increase in the unemployment rate," and "Since current policy is in restrictive territory, changes in risk balance may require an adjustment of the policy stance." This was a clear contrast to the July FOMC press conference just a month earlier, where Powell had leaned more heavily toward the risks of inflation and maintained a cautious stance.

"The Door for a September Rate Cut Is Wide Open"

The market reacted immediately to the more dovish shift than expected. Stock prices, which had been falling until the previous day, surged, and the probability of a September rate cut in the federal funds futures market—down to 75% before the speech—jumped to 92% immediately after. The yield on the 2-year U.S. Treasury fell by more than 10bp (1bp=0.01 percentage point). The Dollar Index also dropped by nearly 1%.

Wall Street generally evaluated that "Powell threw the door for a September rate cut even wider open." Michael Feroli, Chief U.S. Economist at JPMorgan, said, "Powell's comments reaffirmed the market's expectations that the Fed will cut rates at the September FOMC meeting," and that "If Fed leadership wants to retract this guidance today, the August jobs report will have to be quite strong."

Richard Clarida, former Vice Chair of the Federal Reserve, said, "Powell's scenario assumes that tariff-induced inflation will not be persistent," remarking, "By next year, the impact of tariffs will likely have passed. If inflation expectations remain anchored, the Federal Reserve could cut rates by about 150bp from current levels to achieve an ultimate soft landing."

"No September Cut Commitment... Data Is Key"

On the other side, caution still remains. While Powell's speech was not as hawkish as feared, it did not confirm an imminent September rate cut or signal a return to a continuous easing cycle. In fact, Powell said, "There is a possibility that the price pressures caused by tariffs could promote a more persistent inflation dynamic," adding, "Although inflation expectations are still fairly well anchored, we should not take their stability for granted."

Notably, there are many voices emphasizing that the outcome could change depending on key data the Fed will be able to examine before the September FOMC meeting, such as the July Personal Consumption Expenditures (PCE) price index, the August jobs report, and the August Consumer Price Index (CPI). Eric Rosengren, former President of the Federal Reserve Bank of Boston, assessed Powell as "moderately dovish" but pointed out, "I don't see this as a 'promise' for a September rate cut. It simply means the Fed could cut rates if upcoming data continues in the current direction." He said, "Powell has opened the door, but that doesn't mean they must walk through it." Andrew Grantham, Chief Economist at CIBC, also commented, "Depending on the August jobs report, the Federal Reserve could cut rates in September or perhaps in October."

Within the Fed, there are still many who are concerned about inflation risks. After Powell's speech, Beth Hammack, President of the Federal Reserve Bank of Cleveland, stated, "For now, we are completely focused on curbing inflation," explaining, "There is very little gap to the neutral rate, and we need to be extremely cautious in closing it." In other words, they warn against cutting rates too hastily.

As some of the initial relief-driven exuberance subsided, the probability of a September rate cut in the federal funds futures market slightly decreased from 92% to 87% as of 1 p.m. Eastern Time in New York. Nevertheless, the stock market, which had been held back while fixated on Powell's remarks, continued to rally. In particular, the Russell 2000 Index, a rate-cut beneficiary, rose by nearly 4%, and cyclical consumer goods, homebuilding, and financial sectors all recorded significant gains.

Jackson Hole = Special Correspondent Bin Nansae binthere@hankyung.com