US Monetary Policy Outlook: The Jackson Hole Symposium and Powell’s Remarks

The labor report released at the beginning of the month showed an increase in unemployment that exceeded the Federal Reserve's (Fed) projections, causing market panic and raising concerns about a potential recession in the U.S. economy. However, last week, inflation and labor market data revealed that this panic was an overreaction, as economists had previously noted.

As economist Jonathan Levin emphasizes, in the early stages of a recession, weak consumer spending leads to layoffs, which are followed by further weakening of consumer spending. However, recent data shows that U.S. household consumption expenditures remain strong and that the softening in the labor market is not at a concerning level.

Following the latest data, the extreme expectations for rate cuts from the Fed this year have been tempered, though market participants continue to expect a cut at the September meeting.

The focus of the debate has shifted from whether the Fed will cut rates to how much they will cut. According to the FedWatch tool, the probability of a 25 basis point rate cut at the September meeting is pricing at 71.5%.

This week, all attention will be on the Fed’s Jackson Hole symposium. Before the symposium, the minutes of the Fed’s July 30-31 policy meeting will be released early Thursday and scrutinized.

Fed Chair Jerome Powell is expected to speak on the economic outlook during the symposium’s opening remarks. Markets are hoping Powell will confirm rate cuts in this speech. However, it is unlikely that he will provide a clear signal regarding the extent of the cuts. It is particularly believed that Fed officials will want to see the labor report, which will be released before the September meeting.

Gold Seeks Consolidation Near All-Time Highs

U.S. Treasury yields remain low as markets track this week's events to shape their expectations regarding interest rate cuts. The 2-year yields are around 4.03%, while the benchmark 10-year yields are at approximately 3.86%.

The ongoing downward trend in yields and rising geopolitical tensions are providing tailwinds for non-yielding precious metals. After setting a new all-time high last Friday, GOLD is seeking consolidation around $2,500 per ounce. Traders may hesitate to place new bets on gold prices ahead of the expected clues from the symposium.

Asian Currencies on the Rise: PBoC's Rate Decision in the Spotlight This Week

The fading recession concerns in the U.S. and expectations of interest rate cuts from the Fed, combined with a recovering domestic environment in Asia, have boosted sentiment in the region. This has led the Asian currency index to reach its highest level in seven months. Economists foresee a brighter outlook for Asian economies in the coming quarters under the current conditions.

One of the key developments in Asian economies this week is the interest rate decision from the People’s Bank of China (PBoC). Following last month's surprise rate cut, market participants expect the PBoC to keep the 1-year and 5-year prime lending rates unchanged at Tuesday’s meeting.

Last week, PBoC Governor Pan Gongsheng pledged to take further steps to support economic recovery but emphasized that he would avoid drastic measures. Pan did not provide detailed information on policies related to the real estate sector but reiterated that the PBoC had provided a lending program to help local governments finance the purchase of unsold homes. In China, the down payment rate for mortgage loans has dropped to a record low of around 15%, and Pan stated that interest rates are also very low.

Economists predict that the PBoC will assess the third quarter's economic performance and, based on that evaluation, may implement two or three additional 10 basis point cuts in the fourth quarter.

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