For weeks, market players have been anticipating this morning's speech from Jerome Powell at Jackson Hole, Wyoming. The speech is entitled "Challenges of Monetary Policy" and is scheduled for 10 a.m. ET. The text of the speech should be released a few minutes in advance.
It is a near certainty that there will be a strong response to the news. Not because they are likely to be surprising or unanticipated, but because traders and computer algorithms are going to react to this catalyst no matter what it might be. The volatility that this news creates is self-fulfilling to a great degree.
The main focus of trades will be whether Powell sticks with his comments that this is just a 'mid-term correction' rather than the start of a new round of easing. Currently, the market anticipates a quarter-point cut in September, the likelihood of another cut in October and a 50-50 chance of a third cut in December. Shifts in the probability of those cuts is what will drive the market reaction today.
The more-important issue that will come to the forefront today is whether the market remains confident that a dovish Fed can keep the market trending higher. Over the past month, a collapse in bond yields was not celebrated like it was in the past. Concerns that the central banks might not be able to stop the economy from slowing has been building.
What makes matters more difficult is that there is no uniform view at the Fed. Several members have stated that they see no reason for further rate cuts at this time, while others like the idea of a 50 basis point cut as an insurance policy. On top of that, President Trump has been relentless in pushing the Fed to lower rates to compete with central banks in Europe and Asia.
The market obviously wants some dovish signs, but can Powell be dovish enough to please the market? Will rate cuts be enough to offset the growing concerns about a possible recession?
The stage is set for some dramatic action today -- and I'll be looking for several swings to occur while market players try to sort out all the ramifications. Powell has not produced the positive market reactions that his predecessors tended to produce and there are many traders looking to "sell the news" if Powell offers little new.
Early indications are softening as talk of China countermeasures on trade are starting to circulate.