All attention in the markets will be on Fed chair Jerome Powell’s speech to be delivered this evening at 10 a.m. ET. This speech will take place in an environment where concerns that the Fed is late for interest rate cuts are growing and this increases the pressure on the Fed. According to the Washington Post, Powell will make the riskiest speech of the year.

Whether the Fed will cut interest rates in September is no longer a question. What is unknown is whether this rate cut will be 25 or 50 basis points. Powell avoided giving important details in his past Jackson Hole speeches. While the Fed chairman may give messages that there will be an interest rate cut in September, he may stay away from giving clues about the size of the cut.

As of today, markets expect the Fed to cut interest rates by 100 basis points by the end of the year. There are three meetings left, namely September, November and December. Therefore, a 50 basis point cut is required in one of these meetings in order to fulfil the market’s expectations. Fed officials have closed the door to this possibility in their speeches so far.

Before Powell’s speech today, there was an important development regarding employment data. The Ministry of Labour announced that the US economy created 818 thousand fewer jobs in the 12 months to March 2024 than the previously announced data. This downward employment data revision was recorded as the largest downward revision in the last 15 years. It also increased the pressure on the Fed to cut interest rates.

“It may leave the door open to a 50 basis point cut”

Investment bank Evercore, in a report published recently, suggested that Powell will give messages that will leave the door open to a 50 basis point cut.

Natixis Investment Managers Solutions chief portfolio strategist Jack Janasiewicz said, “To us, the key will be Chair Powell’s tone, which we expect to lean dovish” or towards lower rates. Simply put, inflation continues to trend towards the 2% target seemingly at a rate exceeding consensus. Combine this with signs that the labor market is softening and one gets the sense that there is little need to retain a hawkish stance.”

Bank of America expects a repeat of the July message

On the other hand, Bank of America economists expect Powell to repeat his message in July. In July, Powell emphasised that an interest rate cut was possible in September if price pressures continued to decline.

“He will seek to dampen expectations of 50 basis points”

British economist Ian Shepherdson disagrees with Evercore’s view that the door will be left open to a 50 basis point cut. Shepherdson commented, “We expect Chair Powell Friday to confirm the September easing, which will be accompanied by forecasts for higher unemployment and lower inflation than in the June Summary of Economic Projections, But we think he will seek to dampen expectations of 50 basis points, as well as reiterating that the Fed is data-dependent and does not make decisions in advance.”

Fed minutes released yesterday also showed that the vast majority of officials agreed that a cut in September would be appropriate. However, these minutes were released before the lower-than-expected July employment data and inflation data, which fell to a three-year low.

Employment data to be released before the Fed’s meeting on September 17-18 is of great importance. The September 6 employment data will be decisive on whether an aggressive cut will be made.

According to CME FedWatch, the probability of a rate cut in September is priced at 100%. However, the probability of a rate cut of 25 basis points is priced at 73.5% and the probability of 50 basis points is priced at 26.5%.

Bitcoin is trading above $61,000 in the hours leading up to the critical speech.