Federal Reserve Chairman Jerome Powell is set to address attendees at the annual symposium in Jackson Hole, Wyoming, where he is expected to focus on the neutral rate of interest. The neutral rate represents the level of real short-term interest rates that are projected to exist when the US economy is at its strongest point and inflation is stable.
Currently estimated to be around 0.5%, the real neutral rate may be increasing due to the favorable performance of the economy. If the neutral rate is higher than initially thought, policymakers may need to implement further interest rate hikes and potentially delay the timing of their first rate cut.
Traders and investors have already adjusted their expectations for the first rate cut, pushing it further into next year. However, the market is not fully prepared for the possibility of rate hikes being put back on the table.
This year has seen positive growth in the stock market, with the Dow industrials, S&P 500, and Nasdaq Composite showing increases of 4%, 15.5%, and 31.1% respectively.
Speculation around Powell’s speech causing volatility and a decline in stocks is high if he suggests that more rate hikes are likely in the future.
The symposium’s theme, “Structural Shifts in the Global Economy,” has led experts to anticipate Powell addressing the neutral rate specifically.
The Treasury market has already priced in better-than-expected US economic growth, resulting in yields reaching multiyear highs. This rise in yields has played a role in the decline of US stocks throughout August, with the S&P 500 experiencing a decrease of more than 3% this month.
While Powell is expected to adopt a hawkish tone in his speech, he is also anticipated to emphasize the importance of data dependence to keep options open.
Some investment professionals believe that the Federal Reserve is nearing the end of its rate-hiking cycle. However, any discussion surrounding a higher natural rate of interest could create market uncertainty.
