by Michael MacKenzie
Bond investors are heading into Friday’s much-anticipated Jerome Powell speech largely expecting the Federal Reserve chair will indicate policymakers will start cutting interest rates next month.
Powell’s speech, slated for 10 a.m. New York time at the central bank’s annual gathering in Jackson Hole, Wyoming, has been the focal point this week, for good reason. In recent years, he has used the occasion to make market-moving policy news, with investors zeroing in on whether the Fed chair pushes back — or not — on the current pricing for rate cuts.
Interest-rate swaps have retreated in recent days amid hawkish comments from other Fed officials and mixed economic data. But the market still shows about a 70% chance of a quarter-point cut at the September meeting, and close to 50 basis points of easing for 2025.
Powell has come under intense pressure from President Donald Trump and other White House officials to resume cutting rates, with the central bank on hold at a range of 4.25% to 4.5% since December. Jackson Hole may well see Powell enshrine the Fed’s policy independence.
A hawkish tone during the speech will likely weigh on shorter-dated government bond yields. It may also add pressure to a recent series of large trades in the options market, which have targeted an outsized rate cut next month and a total of 75 basis points of reductions by year-end.
“There is a good chance of a hawkish presser and that the chair is not inclined to lower rates,” said Tom di Galoma, managing director at Mischler Financial Group.
To preserve policy flexibility, Powell may remind investors that any move in September depends on the next round of employment and inflation reports, scheduled for release early next month.
“Powell will not want to lock in a rate cut path for a decision in September, he will probably fall a little bit on the side of suggesting that the economic data has weakened enough to support consideration of a rate cut,” said Jason Pride, head of investment strategy and research at Glenmede.
That approach will probably keep the bond market in its current range, with the two-year camped at around 3.75% and the 10-year stuck near 4.30%.
Shorter-dated yields have already moved 11 to 16 basis points lower across two- and five-year notes this month, holding on to some of the rally that was triggered by weak July employment data.
Benchmark 10-year yields held at 4.33% in Asia trading Friday.
In 2024, Powell in Jackson Hole opened the door to a Fed easing cycle amid signs of a faltering job market, sparking a tumble in two-year yields that day as his comments vindicated traders who’d been wagering on rate cuts. A year later, the US labor market is deteriorating again, but unlike in August 2024, inflation risks have risen.
Officials in July worried about inflation rising further as tariffs work their way through the economy, according to the Fed meeting minutes released Wednesday. Elevated asset prices also suggested less of a need to cut rates. The central bank has held rates steady all year, with Powell advocating to wait to see the extent of any tariff-induced inflation before resuming cuts.
What Bloomberg strategists say...
“As we know, the Fed’s utter loathing of springing any sort of rate surprise on the market means that market pricing can effectively become a fait accompli.”
— Cameron Crise, MLIV
Bond investors expect labor weakness to outweigh concerns about inflation. Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management, said he expects “Powell to again nod toward monetary easing,” and that despite “some hot spots in this month’s inflation reading, it’s probably not enough to deter the doves on the committee.”
Should next month’s data lead the market to continue to anticipate easing, one should expect an endorsement from Fed officials, Glenmede’s Pride said.
“The Federal Reserve has a bias that when nothing looks like it’s falling apart, you tend to deliver what you have managed to build into market expectations at this point in time,” Pride said.
Strategists at BMO Capital Markets suggest the following game plan in the wake of the initial reaction to Powell’s speech. “We’d look to fade a rally in the two-year sector in the event that Powell is dovish, but doesn’t seal the deal on a September rate cut. Conversely, we’d be dip-buyers if the market misconstrues a hawkish comment as an indication that a September rate cut is not in the cards.”
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