Market expectations may face a cold reception! Economic data is fluctuating, and Powell's speech on Friday is unlikely to clearly discuss a rate cut.

For Federal Reserve Chairman Powell, the annual speech in Jackson Hole, Wyoming on Friday could be an opportunity to convey policy changes. Last year, Powell used this opportunity to propose a policy adjustment, which was followed shortly by a significant rate cut. Now, he faces immense pressure from US President Trump to cut rates again. The problem is, key economic indicators do not all suggest that this situation will continue. A few weeks ago, when the latest non-farm payroll report showed a decline in employment numbers, the reasons for a rate cut seemed almost irrefutable. Subsequently, the US PPI showed the largest increase in three years - heightening concerns about inflation caused by tariffs, which has prevented Fed officials from taking action so far this year. Weak non-farm payroll data and strong PPI indicators have caused fluctuations in market rate cut expectations. All of this has made Powell's speech in Jackson Hole subject to increased scrutiny. Last month, Powell mentioned that the labor market was strong, and policies were in a favorable position. Investors will closely monitor any subtle changes in these areas - even small changes - as they could potentially pave the way for Fed action at the September 16-17 meeting. However, given that more economic data will be released before then, Powell may be more inclined to cautiously adjust his stance. Jonathan Pingle, Chief US Economist at UBS Securities, said, "While I expect him to generally indicate a rate cut at the next meeting, I do think he will do so based entirely on data. I don't think he will commit to anything." The bond market seems to have already priced in rate cuts. The yield on the US 2-year Treasury bond (most affected by Fed policy) has dropped significantly this month, as traders overwhelmingly expect a 25 basis points cut in September. After the unexpectedly poor July non-farm payroll data (the previous two months' data were also revised downwards), these bets quickly increased. However, after the unsettling inflation data last week, these bets eased slightly. Bond investors are closely watching whether Powell will acknowledge this market pricing outcome, or whether he will indicate that new data before the next policy meeting may change the situation. They are also trying to find clues about the long-term trend of further rate cuts by the Fed until next year. Ed Al-Hussainy, Interest Rate Strategist at Columbia Threadneedle Investments, said, "One focus of this strategic discussion is whether to start early and proceed slowly, or start later and take a more aggressive approach." Although the focus will be on this aspect, the discussion on interest rate trends in Powell's Jackson Hole speech may be relatively brief in terms of word count. According to the CME FedWatch Tool, the market currently expects an 85% chance of a rate cut in September, with a general expectation of at least two rate cuts this year. Fed officials are currently divided internally, with officials maintaining a wait-and-see approach. They are concerned that after Trump raised import tariffs to record levels, the US may face persistent inflation issues. So far, this has not resulted in the substantial rise in consumer prices that people feared. However, potential inflation in July has increased - the PPI has also experienced a similar situation, and firms typically pass on production costs to consumers with some lag, so the PPI has a certain leading effect on the CPI. Meanwhile, within the Fed, the consensus on adopting a cautious policy stance has already broken down - mainly due to weakness in the labor market. Fed Governors Waller and Bowman (both appointed by Trump) opposed the decision to maintain rates in July and supported a rate cut instead. Trump emphasized the votes against, in order to intensify his push for a rate cut. He stated that the Fed should lower the benchmark rate (which has been maintained in a range of 4.25% to 4.5% this year) by as much as 4 percentage points. US Treasury Secretary Mnuchin also voiced his opinion last week, advocating for a 50 basis points rate cut in September. This is similar to what the Fed did in September last year. At that time, weak employment data prompted Powell to highlight the risks facing the labor market in his speech at Jackson Hole. The situation is different now, with the tariff issue looming. San Francisco Fed President Daly believes there may be a need for two rate cuts this year, but she dismissed the idea of a significant rate cut next month, calling it unnecessary urgency. However, people feel that Fed officials are more divided on the economic outlook than they have been in some time - which is another reason why Powell may avoid giving a clear indication this week. Powell's farewell speech may involve adjustments to policy goals framework. This speech will be his last at the annual symposium before stepping down as Fed Chairman in May next year - against the backdrop of some of the most turbulent times in recent Fed history. Trump has fiercely criticized Powell's leadership and openly considered replacing him, leading many observers to see it as a serious threat to Fed independence. In addition to criticizing the Fed for not being willing to cut rates this year, Trump and his allies have also emphasized the soaring inflation that occurred after the pandemic. This is related to another issue that Powell may address at the Jackson Hole meeting: the continuous review of policy framework by the central bank, which is expected to draw lessons from the experiences during the COVID-19 pandemic. Overall, this speech may have a farewell tone. Pingle said, "Former chairs use the last Jackson Hole speech as an opportunity to review their term. This is their chance to write history for themselves." Framework Review When it comes to the so-called "framework review" that Fed officials have been conducting this year, Powell may take a more cautious stance. It is expected that Powell will offer insights on the latest thinking regarding this crucial guiding principle for long-term monetary policy. The current version was established in 2020, when the Fed made two important adjustments. First, it allows inflation to temporarily exceed the 2% target if inflation remains persistently below that target. Second, it completely abandons the view that an overheated job market will necessarily lead to rate hikes to prevent inflation, even if actual price pressures have not yet emerged. These more dovish policy adjustments were influenced by the sluggish recovery of the US economy after the 2008 financial crisis. At that time, with inflation kept in check and high unemployment rates, the main threat to the Fed's goals of employment and inflation came from the economy's weak state. When the unemployment rate eventually fell to low levels, it did not lead to significant inflation. In economists' terms, the risks were asymmetric. Unfortunately for the Fed, these framework adjustments came into effect at the time of the pandemic outbreak, when the US was facing its most serious inflation in forty years. Critics from within and outside the Fed argue that the new framework is not suitable for the inflation surge caused by the pandemic, and has also resulted in lagging Fed responses. Powell has indicated that both parts of this framework may now be scrapped, and a new framework will be applicable to a broader range of economic conditions. Those monitoring the Fed may learn more details during the Jackson Hole meeting. Michael Pugliese, Senior Economist at Wells Fargo, said, "The consequences of the pandemic 'strongly remind us that the labor market may overheat and inflation rates may significantly exceed target levels.' I believe people will try to connect these lessons with the current situation. At present, the risks around the dual goals seem to have reached some kind of balance once again."