Dovish Outlook for Jackson Hole Event as Powell Suggests 50bps Rate Cut: Citi

Federal Reserve Chair Jerome Powell is set to address the Jackson Hole Symposium at 10 AM on Friday, where he is anticipated to allude to a widely expected rate cut during the upcoming September FOMC meeting. This follows last week’s release of core CPI data, which indicated a 0.165% month-over-month increase, representing the third consecutive month of annualized rates at or below 2%.

The focus has shifted from whether the Fed will begin a rate-cutting cycle to how quickly and significantly it will proceed, according to economists at Citi in a recent commentary.

They noted, “We continue to see economic risks skewed toward a notable weakening in labor markets and the broader economy, with the potential impact of dovish Fed policies being underestimated by the markets.”

Citi predicts 50 basis point rate cuts in both September and November, though they expect Powell to refrain from committing to specific policy paths, emphasizing that decisions are “data dependent.”

A significant element of Powell’s upcoming speech will likely address the changing landscape of risks, as labor market concerns emerge amid easing inflationary pressures. At the FOMC meeting on July 31, prior to the uptick in unemployment and despite stable core inflation, Powell began to indicate a shift in risk assessment from inflationary stability toward employment issues.

Recent data, showcasing a slowdown in inflation and a quicker-than-expected easing of labor market conditions, could provide Powell with two key arguments for a more aggressive approach to rate cuts.

First, he may point out that as inflation diminishes, the real policy rate—nominal rates adjusted for inflation—effectively rises, suggesting that nominal rates need to be lowered to prevent excessively tight monetary conditions.

Second, the quicker softening of the labor market could justify more rapid adjustments toward neutral policy rates. Despite recent strong retail sales and a drop in initial jobless claims, Powell is likely to maintain an optimistic outlook on the U.S. economy’s resilience against recession.

However, as the Citi economists observe, with the “Sahm rule” nearly triggered, Powell’s sentiment from July that downside risks to employment have grown more significant may be reinforced.

They anticipate that Powell might leverage his Jackson Hole speech to affirm that policy is “well positioned” to adapt to changing data, potentially indicating a significant opportunity for rate reductions.

“While he will avoid firmly guiding toward or against 50 basis points cuts, he will keep that option open,” the economists stated.

The address may also set the stage for larger rate reductions, presenting them alongside a clear macroeconomic rationale to mitigate any perceptions of “panic.”