July Jobs Shock... Will Powell Signal a Rate Cut at Jackson Hole in August?

As U.S. employment has sharply slowed over the past three months, expectations for a rate cut in September are rapidly rising, drawing market attention to the upcoming Jackson Hole meeting at the end of this month. With concerns about stagflation (rising prices amid an economic downturn) growing due to the impact of tariffs, a key point of interest is whether Federal Reserve Chair Jerome Powell, who has so far maintained a wait-and-see stance, will send a signal for a rate cut in his Jackson Hole speech, often referred to as the "Teton Mountain Revelation."

Reuters Yonhap News

원본보기 아이콘

According to the Federal Reserve Bank of Kansas City on the 3rd (local time), the 2025 Jackson Hole Economic Policy Symposium will be held from August 21 to 23 in Jackson Hole, Wyoming, under the theme "Labor Markets at a Crossroads: Demographics, Productivity, and Macroeconomic Policy."

The market expects that Powell's speech at the Jackson Hole meeting, which will take place before the Federal Open Market Committee (FOMC) regular meeting on September 16?17, will provide clues about the future direction of monetary policy. In particular, as July employment figures have deteriorated much more than expected, there are projections that the policy priority may shift from addressing inflation to stabilizing employment.

According to the U.S. Department of Labor, nonfarm payrolls increased by only 73,000 in July, far below the market expectation of 106,000. Furthermore, employment figures for May and June were revised down to 19,000 and 14,000, respectively, a significant decrease from the previously reported 144,000 and 147,000. As a result, the average monthly increase in nonfarm payrolls over the past three months was just 35,000, a sharp drop from more than 100,000 a year earlier.

The unemployment rate, which the Fed considers a key indicator of labor market health, rose only slightly from 4.1% to 4.2%. However, analysts note that the recent trend of employment contraction cannot be overlooked. In particular, since the U.S. imposed an additional 10% tariff on the rest of the world in April, there is an assessment that the impact of President Donald Trump's trade policy has begun to affect the entire labor market in earnest.

The U.S. economy grew by 3% quarter-on-quarter in the second quarter, surpassing the forecast of 2.4% and marking a "surprise growth." However, as private demand, which reflects domestic consumption, has slowed, signs of economic downturn are also emerging. The growth rate of private final domestic purchases fell from 1.9% in the first quarter to 1.2% in the second quarter.

The market has already sharply increased the probability of a rate cut in September. According to CME FedWatch, the probability that the Fed will cut the benchmark interest rate by 0.25 percentage points from the current 4.25?4.5% at its September meeting stood at 89.1% as of today, up sharply from 61.9% a week ago.

In this context, there are forecasts that Powell's Jackson Hole speech scheduled for the end of this month could be a decisive moment for gauging whether there will be a shift in the Fed's monetary policy stance. Despite repeated pressure from President Trump for rate cuts, Powell has consistently held rates steady this year. Even after the FOMC meeting on July 30, he maintained a somewhat hawkish (monetary tightening) stance, stating, "The labor market faces downside risks but remains solid," and that "no decision has yet been made" regarding the rate path in September. However, given the clear trend of employment contraction in July, there is cautious speculation that Powell may step back from his previous wait-and-see approach and signal a change in stance.

The fact that there are dissenting voices within the Fed against the majority view of holding rates steady could also be a burden for Powell. Powell is expected to fine-tune the message of his Jackson Hole speech after reviewing key indicators such as the July Consumer Price Index (CPI) and retail sales, which will be released in mid-August. The dilemma is that the CPI for June rose 2.7% year-on-year, an increase from 2.4% in May, further fueling concerns about stagflation.

BNP Paribas stated, "If Powell had seen the employment data before the July FOMC meeting, it cannot be ruled out that he would have implemented a rate cut," adding, "We may be able to confirm a shift in Powell's perspective as early as the Jackson Hole Symposium in August, before the September FOMC meeting."

Meanwhile, Powell's Jackson Hole speech has in recent years been regarded as an occasion that signals the path of U.S. monetary policy in advance. In 2023, he predicted a "prolonged period of high interest rates," stating that rate hikes would continue despite the pain to households and businesses in order to curb inflation. In 2024, he mentioned that the time for policy adjustment (rate cuts) had arrived, hinting at a "pivot" (policy shift) that would occur a month later.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.