Preview of the Jackson Hole Symposium

In a note published Thursday, Bank of America (BofA) strategists provided a preview of the upcoming Jackson Hole (JH) symposium, which will be held from August 22-24. Hosted by the Federal Reserve Bank of Kansas City, this event gathers central bankers, policymakers, academics, and economists from around the globe.

According to BofA, Fed Chair Jerome Powell might choose to provide a straightforward overview of the current economic situation during the symposium, similar to his comments made at the July FOMC meeting. A shift in language from July could suggest that the committee is “very close” to a point where easing may be considered.

A stronger indication from Powell could involve emphasizing the committee’s desire to prevent ‘unexpected weakness’ in the labor market, rather than merely responding to it after it happens.

Powell may also reference the June Summary of Projections, indicating a gradual removal of policy accommodation to balance risks amid an uncertain economic outlook.

BofA strategists believe the beginning of the easing cycle might be perceived as the Fed declaring victory over inflation, though they predict that will not be explicitly stated. Instead, the focus could shift to preserving gains in the labor market. If 2022 was focused on “resolve” and 2023 on “data dependence,” then 2024 might center on “maintaining a solid labor market.”

The Fed’s goal for a soft landing involves bringing inflation back to target without causing a downturn in labor market conditions, according to the note.

While the battle against inflation isn’t fully won, the Fed may assert that it has been sufficiently addressed to now prioritize preventing weaknesses in the labor market.

Regarding market implications, the rates market likely expects the Fed to signal that the next move will be a rate cut. If Powell communicates that a rate cut could be appropriate at the next meeting, contingent on inflation trends, it may align with market forecasts. However, the specifics of any cuts will depend on incoming inflation and activity data.

The market seems to have anticipated this outcome, making such signals unlikely to shock investors. However, the strategists caution against more hawkish tones from the Fed. If Powell fails to suggest a rate cut at the September FOMC meeting or implies that significant reductions are off the table, this could lead to a major bear or twist flattening of the UST curve.

Rate Volatility

On rate volatility, BofA predicts lower gamma following the Jackson Hole event. Historical patterns indicate that rate volatility tends to decrease post-symposium, particularly within the gamma context and in intermediate expiries.

This shift in intermediate expiries likely reflects reduced uncertainty regarding the policy trajectory.

Finally, they foresee minimal impact on the US dollar from the discussions at Jackson Hole. The market is already pricing in four Fed rate cuts for this year, and the USD has been weakening, particularly after the July labor market data fell short of expectations. While inflation is gradually stabilizing, justifying the start of Fed easing, it may not occur at the rapid pace currently predicted by the market.