The Kansas City Fed’s Jackson Hole Symposium will be held 21-23 August. The theme of this year’s conference is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” Economists from around the world will gather in Jackson Hole for these 3 days. Chair Powell will deliver the keynote address at 10:00am EDT on Friday (August 22). The ECB and BoE have also announced that ECB President Lagarde and BoE Governor Bailey will be participating on the Saturday conference overview panel at 12:25pm EDT. This year's discussion bears a striking similarity to the debate twelve months ago: much like then, markets are intensely focused on the Fed's September cut. In 2024, the questions revolved around whether the Fed would initiate the easing cycle with a 25bp or 50bp cut. This year, it's about whether the Fed will resume cuts in September, and indeed the possibility of a 50bp cut has entered the discussion as well. We expect Chair Powell to confirm market pricing for a return to rate cuts in September, but stop short of explicitly committing to cut at that meeting. Chair Powell laid out his framework for approaching a return to rate cuts at the July FOMC meeting press conference. Policy rates are at least “modestly restrictive” in his view, which is appropriate if upside risks to inflation dominate. But if downside risks to employment balance the upside risk to inflation, then it would be appropriate to cut policy rates toward neutral. Now, with a softer labor market backdrop, Powell will be able to say that risks are more balanced and that if data continue to show that is the case, rate cuts would be appropriate at an upcoming meeting. This would be a fairly neutral outcome (70% probability) for markets with a September rate cut fully priced. A dovish risk (5% probability event) would be if Chair Powell more firmly makes the case that the labor market is softening faster than was previously appreciated. A hawkish risk (25% probability event) would be if Powell emphasizes that unexpected pickup in services inflation in July. Data since the July FOMC press conference have been dovish on net, with a downside surprise and large negative revisions to nonfarm payrolls (NFP) and less-than-feared inflation in July. Given that there is another round of monthly economic data between the Jackson Hole symposium and the September FOMC meeting, Powell is unlikely to telegraph what the Fed will do in September. We are tracking core PCE for July at .28% MoM which translates to 2.9% YoY compared to July’24 core PCE of 2.6% when Powell did indicate to cut rates in his Aug’24 JH speech. We believe labor market volatility is going to be the driver for Fed’s future rate cut trajectory. We don’t believe that 50k is the neutral level of monthly NFP now (as suggested by a few FOMC members) because if it is then US GDP estimates should be lower too by the same extent and then neutral rate destination should be reached faster too. We do not see core PCE sustaining above 3% by end CY25 where as we see far higher probability of NFP consistently remaining zero or -ve from October. What will be more interesting is the post JH response from Trump admin to Powell’s commentary. We believe any wait and watch narrative from Powell at JH might push Trump giving go ahead to filing legal case against Powell for the Fed renovation project. Our base case remains 75 bps cut in REMCY25 and another 50-bps cut in Q1CY26. This base case does not assume any legal response from the Trump administration towards Fed Chair Powell.
