Summary of Key Points
Federal Reserve Chairman Jerome Powell is about to deliver his first speech at the Jackson Hole Global Central Banks Symposium. The market's most urgent need is for “clarity” due to his previous ambiguous statements—such as saying that rising U.S. Treasury yields are a good thing and not clarifying whether interest rates will be raised when inflation remains stubborn. These remarks have triggered a series of reactions, including a sell-off of U.S. Treasuries, soaring yields, and volatility in the U.S. stock market. Investors are expecting Powell to address two key issues: whether interest rates will continue to rise as inflation persists, and the Fed’s policy framework (for example, whether it will continue to use the Consumer Price Index (CPI) as the primary indicator of inflation). His statements will not only affect the trends of the U.S. stock and bond markets but also influence the interest rate decisions of central banks around the world (such as those in Europe, the UK, and Japan), and even impact capital flows and manufacturing investment in emerging markets.
Why Does the Market Urgently Need Clarity? Previous Ambiguous Statements Have Caused Panic
The market is currently in a state of confusion—Powell’s speech in July left everyone confused. At that time, he said that rising U.S. Treasury yields were a good sign, implying that the market would tighten monetary policy on its own without the need for the Fed to intervene. However, he did not clarify whether interest rates would be raised if inflation did not subside. This has led to the following consequences:
- U.S. Treasuries Plunged: Investors, worried that the Fed would ignore inflation, have flocked to sell long-term Treasuries, causing yields (which represent the cost of borrowing) to rise sharply. For example, the yield on two-year Treasuries has reached 4.22%, and the overall yield curve has risen by 2-3 basis points. Institutions have even warned that if Powell does not provide clarity this time, the yield on 30-year Treasuries could soar to 5.5% (the highest level since the beginning of this century), making it more expensive for businesses to borrow for expansion and for the government to issue debt.
- U.S. Stock Market Affected: The enthusiasm for AI stocks has cooled down (for example, Marvell’s earnings report was poor, causing its stock price to fall by 7%), and U.S. stock futures also declined during the Asia-Pacific session. Traders are hesitant to buy stocks or bonds, fearing that Powell’s speech could cause another sharp market fluctuation.
The Key Questions Powell’s Speech Needs to Answer: What to Do About Inflation and Interest Rates?
The market wants two clear answers:
1. Will Interest Rates Continue to Rise if Inflation Remains Stubborn? Inflation data from July shows that prices of core goods, housing, and services are still rising, indicating that inflation is not likely to decline easily. However, Powell did not clarify whether the Fed would raise interest rates if inflation persists.
2. Has the Fed Changed Its Inflation Measurement Criteria? He did not specify whether it will continue to use the CPI as the main indicator of inflation, which has raised doubts about the Fed’s policy direction.
Experts at Deutsche Bank believe that Powell needs to address the confusion from July’s meeting. He should either refer to the two scenarios outlined in the June meeting minutes (no interest rate hikes if inflation subsides, or hikes if inflation continues) or clarify the policy framework to give the market some certainty.
Central Banks Around the World Are Watching Powell Closely: Failing to Raise Rates Could Be Disadvantageous
The Fed’s policy serves as a “baton” for other central banks, which cannot ignore it:
- If the Fed Maintains High Interest Rates: If other countries do not follow suit, money will flow to the United States (due to higher interest rates), leading to the depreciation of their own currencies and increased costs for imported goods (imported inflation). For example, South Korea has raised interest rates twice (from 2.75% to 3%) to stabilize the won and prevent capital outflows.
- Europe, the UK, and Japan Are Also Being Forced to Take a Tougher Stand: The European Central Bank and the Bank of England have already indicated their intention to continue tightening monetary policy; the Bank of Japan may also raise interest rates sooner. This could lead to a global era of high interest rates, increasing the cost for businesses to borrow for investment in manufacturing and draining capital from emerging markets, which could slow economic growth.
Institutional Expectations for the Speech: Some Hope for Clarity, Others Fear More Ambiguity
Different institutions have different views on Powell’s speech:
- Optimists (Standard Chartered Bank): Hope that he will rebuild confidence by clarifying two points: that the Fed will definitely reduce inflation to the 2% target and that the Fed’s non-interventionist stance will not harm the economy.
- Pragmatists (Piper Sandler): Believe that he may not provide a clear path for short-term interest rates but must make it clear that interest rates will be raised if needed, to avoid further misunderstandings by the market.
- Pessimists (Brown Brothers Harriman): Expect that he will not provide clear signals but will instead mention newly established working groups (such as those focused on balance sheets and inflation frameworks), leaving the market without the needed clarity.
In summary, Powell’s speech is crucial for stabilizing the market. If he can provide a clear policy direction, market volatility will ease; otherwise, U.S. Treasury yields may continue to rise, and the global economy could become more tense. Ordinary investors should pay attention to whether he clarifies that interest rates will be raised when inflation is high and whether he confirms the use of the CPI as the primary inflation indicator. These signals will directly affect the stock and bond markets, as well as the cost of borrowing in daily life.