Financial News Agency, August 22 (Editor: Bian Chun) The Jackson Hole Global Central Bank Annual Meeting kicked off on August 21 in Wyoming, USA. Federal Reserve Chairman Powell is set to deliver a keynote speech at 10 PM Beijing time tonight. Global investors are holding their breath.
In this speech, Powell may discuss views on the labor market and inflation, the impact of tariffs on the economy, the direction of monetary policy, the independence of the Federal Reserve, and other topics. Among these, investors are most concerned about Powell's views on the Federal Reserve's future policy path, especially clues regarding a rate cut in September.
Powell's speech will come amidst a confusing economic situation. Currently, the U.S. labor market has shown signs of distress, yet GDP is performing well. Inflation is relatively controllable, at least for consumers. However, this is not the case for wholesale producers.
Following the weak non-farm payroll data for July, expectations for a rate cut by the Federal Reserve in September soared to 100%. However, PPI inflation data exceeded expectations, and cautious signals from Fed officials, along with hawkish FOMC minutes, have suppressed rate cut expectations.
According to the CME Group's FedWatch tool, the probability of a 25 basis point rate cut in September is currently 75%, while the probability of keeping rates unchanged is 25%.
The market hopes Powell will solidify rate cut expectations in his speech on Friday, which would benefit risk assets and potentially reverse the recent downturn in technology stocks.
Below are three possible outcomes from Powell's speech on Friday, along with the potential reactions of the financial markets in each scenario.
Scenario 1: The stance is stronger than expected
This is undoubtedly the most concerning outcome: Powell hints that the interest rate path is more conservative than people expect.
Currently, the most likely outcome that investors are digesting is that the Federal Reserve will cut rates twice before the end of the year. Bullish investors hope that lower capital costs will drive future earnings growth for companies, as earnings growth has historically been the main driver of stock market rises.
Despite some sell-offs in U.S. stocks over the past week—especially in AI and chip stocks—the market pricing is still largely in perfect condition, just a stone's throw from historical highs.
This makes the market very susceptible to adjustments in rate cut expectations. If investors find that companies have fewer channels for obtaining funds for reinvestment, acquisitions, and overall profit boosting, they may cut their positions, leading to a market crash.
Scenario 2: The stance is more moderate than expected
This is the best-case scenario: Powell hints that the interest rate path is more accommodative than people expect.
This will provide more momentum for large companies' future profit growth and may boost the stock market. Unfortunately, this is probably the least likely outcome.
It is also important to note that while more rate cut measures would be good news, there may be some rotation within the stock market. As looser funding channels narrow the gap for upward revision of earnings expectations among companies, those large tech stocks that led the market rally may lose favor.
Scenario 3: The stance meets expectations
This is the most uneventful scenario: Powell does what everyone expects him to do. Under the current circumstances, this would mean confirming a rate cut in September and then another before the end of the year.
In this case, the market reaction could be somewhere between lukewarm and negative. Theoretically, if everything goes as planned, the stock market should remain relatively stable. But investors may 'sell the news' (i.e., sell off after the news is out), which means such an outcome has already been fully priced in by the market.