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The stock market is currently exhibiting stability and optimism, with anticipation building around the upcoming address by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium on Friday. The speech is poised to play a crucial role in shaping market expectations regarding potential future rate cuts.
In parallel, Goldman Sachs (GS) has outlined several key issues it hopes Powell will address during the conference. Foremost among these is a demonstration of confidence regarding inflation during the speech.
“We expect Powell to express a bit more confidence in the inflation outlook and to put a bit more emphasis on downside risks in the labor market than in his press conference after the July FOMC meeting, in light of the data released since then,” said David Mericle, Goldman Sachs (GS) research’s chief U.S. Economist, in a recent report.
Three consecutive 25 basis point rate cuts are possible
In the report, Goldman Sachs has projected a series of three consecutive 25 basis point rate cuts in September, November, and December, with additional quarterly reductions anticipated next year, aiming for a terminal rate between 3.25% and 3.5%.
The bank argues in the recent report that the recent rise in the unemployment rate, along with other softer indicators in the labor market, should prompt the Federal Open Market Committee (FOMC) meeting, which is due on Wednesday, to accelerate its rate-cutting pace. However, the bank does not foresee a 50 basis point cut at this time.
What is expected from the Fed Chair?
The Federal Reserve’s Jackson Hole Economic Symposium will be held from Thursday to Saturday this week. This year’s theme is “Reassessing the Effectiveness and Transmission of Monetary Policy.” A highlight of the conference will be Chair Jerome Powell’s address on the economic outlook, scheduled for 10 a.m. EDT on Friday.
In the report, Goldman Sachs suggested that Chair Powell should focus more on the inflation outlook and place greater emphasis on the downside risks present in the labor market.
“We expect Powell to offer a more dovish version of his message from the press conference after the July FOMC meeting in light of the soft CPI report, the weak job growth numbers, and the further increase in the unemployment rate since then,” wrote Mericle.
Goldman Sachs expects the interest rate to ease soon
The current interest rate is between 5.25% and 5.5%. The Federal Reserve has raised rates 11 times since March 2022, and the current level has been unchanged since July 2023. Although many banking institutions and analysts anticipate rate cuts in September, the key question is not whether the Fed will lower rates but by how many basis points and whether further reductions can be expected later in 2024.
While these rate cuts may not immediately alter Americans’ everyday lives, they offer critical insights into economic performance and the future direction of monetary policy. Such decisions have significant implications, impacting not only the U.S. economy but also global financial markets.
Mericle noted in the report that the conference theme is expected to be framed largely in a retrospective context. He added that any interest rate cuts are likely to provide a smaller-than-usual boost to cash flow through the refinancing channel.
“In light of how much room the Fed has to cut, we are not very worried about this,” he added.
