Later this week, the world's attention will once again focus on the small town of Jackson Hole, Wyoming, where economists, central bank governors, and prominent business leaders from around the globe will gather for the annual global central bank conference hosted by the Kansas City Fed.

This annual event has become a key summer milestone for observing the dynamics of the Federal Reserve. For investors, the most anticipated moment will be the speech delivered by Fed Chair Jerome Powell on Friday (August 22).

In his speech this Friday, Powell will face a dilemma: whether to continue prioritizing anti-inflation measures or to pay more attention to employment issues before his term ends in May next year. Recent U.S. economic data has shown a clear "tug-of-war" trend, bringing significant uncertainty to Powell's policy decisions, with divisions within the Fed regarding which risk—inflation or unemployment—is greater.

The latest non-farm payroll data for July revealed that the U.S. added only 73,000 jobs, far below market expectations, while employment data for May and June was also significantly revised down, bringing the average job growth over three months to around 35,000, indicating a noticeable slowdown in the labor market.

At the same time, inflation performance on the production and consumption sides has diverged. The Producer Price Index rose by 0.9% month-on-month in July, marking the largest monthly increase in nearly three years, primarily driven by tariff policies and rising supply chain costs. However, the Consumer Price Index increased by 2.7% year-on-year, with the core CPI at 3.1%, slightly above the Fed's 2% target, but the overall increase remains moderate.

In the market, investors generally expect the Fed to cut interest rates by 25 basis points at the September policy meeting, but the recent unexpected rise in wholesale prices has slightly dampened expectations for a rate cut.

However, whether to cut rates may not be the most critical question; the key lies in how Powell articulates the future policy path. Former Fed Vice Chair and current Pimco Global Economic Advisor Richard Clarida stated, "From what I understand, Powell wants to rely on data and will not make decisions in advance. If there is indeed a rate cut in September, communication will be crucial. What message do we want to convey? Is this the beginning of a series of actions? Even if they want to cut rates, communication could be a challenge."

Currently, the Fed is re-evaluating adjustments to its policy strategy, tools, and communication since 2020. As a matter of course, central banks revise their frameworks every five years. The market expects Powell to announce the latest results of the monetary policy framework assessment at this week's Jackson Hole meeting.

The previous framework introduced a "flexible average inflation target" due to inflation being slightly below the Fed's 2% target for a long time before 2020. However, the recent rise in inflation and its potential risks to inflation expectations and consumer confidence may lead the Fed to abandon this approach.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, stated, "While the 2020 framework reform was not the main reason for the Fed's delayed rate hikes and significant inflation overshoot, it did influence the outcome to some extent."

Luzzetti expects Powell to reiterate a more forward-looking monetary policy strategy in his speech, emphasizing the risks of supply shocks and returning to a balanced consideration of inflation and the labor market. Powell previously noted in a speech in May, "The economic environment has changed significantly since 2020, and our assessments will reflect these changes." He also mentioned that future inflation may be more volatile than in the 2010s, and the U.S. may enter a new period of more frequent and longer-lasting supply shocks.

According to statistics from Bespoke Investment Group, U.S. stocks typically perform well during Jackson Hole week, with a median increase of 0.8% historically. In the 16 cases since 2009, the S&P 500 index has only declined at the end of the "Jackson Hole week" five times. Instances of declines exceeding 1% occurred only twice: in 2019 and 2022.

While the returns on U.S. Treasuries during this period are not as strong as those of U.S. stocks, statistics show that the median return of the iShares 20+ Year Treasury Bond ETF is also 0.2%.

Looking ahead to this year's Jackson Hole central bank meeting, Bespoke believes that, aside from historical performance data, investors seem to be preparing for potential volatility. At the end of last month’s meeting, two Fed governors cast dissenting votes on the interest rate decision, marking the highest number of dissenting votes among board members since 1993.

Neil Dutta, Head of Renaissance Macro Research, believes that it may be wise for stock investors to take profits before the Jackson Hole meeting. He pointed out that macroeconomic models strongly suggest that the Fed's policy rate should be lower. However, if Powell implies that rates should be lowered, he may need to acknowledge that the labor market is indeed weakening. Given that stock valuations have soared to historical highs, any signs of disappointment could put pressure on the stock market.

Julian Emanuel, Chief Equity and Quantitative Strategist at ISI, believes that investors are eagerly hoping that Fed Chair Powell's keynote speech at the Jackson Hole meeting on Friday will maintain an appropriately dovish stance, but there is a risk that this may not be achieved—potentially signaling danger for the stock market.

This year's Jackson Hole meeting is set to become the focal point of global financial markets. Powell needs to seek a balance between anti-inflation measures and employment stability while addressing adjustments to the future monetary policy framework. Against the backdrop of rising expectations for a rate cut in September, investors are closely watching how he will express and guide expectations. Although historical data shows that U.S. stocks often rise during "Jackson Hole week," the current high valuations, increasing policy divergence, and volatility in macro data may make this year's meeting a test of risk.

Related: Is the bottom for Bitcoin (BTC) price at $114,700? Data suggests the reversal timing has arrived.

Original article: “Powell's Dilemma: Markets Hover Between Anticipation and Anxiety Ahead of Jackson Hole Symposium”

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