In 1982, the Federal Reserve Bank of Kansas City moved its then newish annual gathering of central bankers, academics and policy makers to a fly-fishing resort in Wyoming. It did so to persuade the US Federal Reserve (Fed) chair Paul Volcker to show up. It worked, and so pleasant was the location that the Kansas Fed has gone back every year since. Jackson Hole has become a key fixture in the economic calendar.
In theory, the end-August symposium is no more than an opportunity for a small group of important people to chew the fat on economic and monetary policy. But over time it has morphed into an important platform for the US central bank to guide market thinking about interest rates.
In the dog days of late summer, it also has the potential to be a significant market-moving event. And never more so than this year, just months before the Fed’s long-standing chair, Jerome Powell, is due to step down, with the central bank under unprecedented attack from an increasingly hostile White House and the stock market hitting new highs.
In the past three years, Powell has used the three-day summit to signal imminent interest rate movements in both directions. This week, with monetary policy pulled in two directions by persistently above target inflation and the early signs of an economic slowdown, his carefully chosen words will be scrutinised more closely than ever.
In 2022, Powell used the Wyoming off-site to warn that a post-pandemic inflation spike demanded tighter-for-longer monetary policy. That took the wind out of the sails of a powerful bear market rally and set up the S&P 500’s final down leg to its October low.
Then this time last year, the Fed chair announced that the central bank was ready to lower rates again. Three quick cuts followed, although there has been no further movement since last December. This extended ‘wait and see’ approach has been the cause of undisguised irritation in the White House.
The market is once again pricing in a quarter point cut at next month’s rate-setting meeting. But I would not be surprised if this most cautious and data-focused central banker holds fire once more.
On the one hand, recent inflation readings have started to show the first mild effects of tariffs, with pressures mounting in the service sectors which dominate the US economy. Core inflation is running a full percentage point above the Fed’s 2 per cent target. And Powell is determined not to be bullied into cutting too soon and letting inflation out of the bag.
But the persistence of inflation makes it hard for the central bank to respond to the other challenge facing the US economy, signs that the labour market is finally succumbing to the Fed’s modestly restrictive policy over the past couple of years. The July jobs report showed just 73,000 new positions and there were downward revisions to the prior two months. The three-month average employment gain is just 35,000. As a consequence, Powell presides over a rate-setting committee that is split over how to meet its dual mandate of stable prices and maximum employment.
Perhaps more important than any hints about whether or not the rate-cutting cycle resumes in September will be what Powell has to say about the framework that the Fed uses to set policy. Early in his eventful eight-year tenure, he made it clear that he intended to respond to economic data and not rely on economic models and forecasts. That focus on the evidence suits his cautious temperament, but it has arguably left the Fed behind the curve - which is the point that the President and his Treasury Secretary, Scott Bessent, are making, albeit without much grace.
When the rate-setting framework was last tweaked in 2020, the Fed adopted a flexible approach in response to a period in which price growth had remained slightly below the Fed’s target. While that was not the only reason that the Fed was slow to respond to the Covid inflation surge, it undoubtedly played a part. When US President Donald Trump taunts Powell as ‘too slow’, there is a grain of truth in his criticism.
Of greater interest to investors on Friday will be how the market reacts to the news from the Rockies. With the odds on a rate cut next month so short, anything that casts doubt on that outcome could be taken negatively by investors who have been determined to view the glass as half full this summer.
It has been another week, another new high for shares, with the S&P 500 approaching 6,500. That would have seemed inconceivable in April when the ‘liberation day’ tariff shock pushed the US index to only a little over 4,800. Even if you strip out the distorting impact of the Magnificent 7 technology stocks, the equal-weighted benchmark is close to its all-time high. Two thirds of shares are above their moving average.
That is not unreasonable. With the second quarter results season now done and dusted, around half of the reduction in earnings estimates since the announcement of tariffs has been clawed back. The forecast earnings growth for 2025 now sits at just over 9 per cent, which is better than we might have expected so far into the post-pandemic recovery.
Although the US market looks stretched, priced at 24 times expected profits, the valuation of the equal-weighted index is only a fraction above its long run average, at 18 times earnings. Investors may be making some biggish assumptions about tax cuts and monetary accommodation down the track, but for now the numbers justify their optimism.
Tom Stevenson is an investment director at Fidelity International. The views are his own.
