Investors expect Powell to tee up September rate cut in Friday speech

Bond traders are betting that Jerome Powell will send a clear message this Friday morning that interest rate cuts are coming next month.

The Federal Reserve Chair is scheduled to speak at 10 a.m. in Jackson Hole, Wyoming, during the Fed’s yearly economic gathering. Powell typically uses this platform before to change expectations, so now investors want to know if he’ll challenge current bets on rate cuts or quietly go along.

According to Bloomberg, the market currently shows a 70% chance of a 0.25% cut in September and 50 basis points of total easing in 2025. These expectations come even after interest-rate swaps pulled back slightly following hawkish remarks from other Fed officials and choppy economic reports.

Traders prepare for either confirmation or chaos

If Powell sounds hawkish, shorter-term bond yields could spike. And that would squeeze the massive bets made in the options market this month. Traders have placed large positions on a deep September rate cut and a total of 75 basis points of cuts before year-end.

Jason Pride, head of investment strategy and research at Glenmede, said Powell “will not want to lock in a rate cut path for a decision in September.” Pride expects Powell to “fall a little bit on the side of suggesting that the economic data has weakened enough to support consideration of a rate cut.”

Tom di Galoma, managing director at Mischler Financial Group, doesn’t expect a firm commitment. “There is a good chance of a hawkish presser and that the chair is not inclined to lower rates,” he said. Powell may want to keep things flexible.

That means the decision for September likely hinges on the next employment and inflation reports coming out in early September. Until then, the bond market might stay stuck, with the two-year yield near 3.75% and the 10-year holding close to 4.30%.

So far this month, shorter-dated yields have dropped 11 to 16 basis points across two- and five-year notes. That drop followed weak job numbers in July. But in early Asia trading Friday, Treasuries were barely moving. Everyone’s just waiting.

Powell expected to signal caution as inflation risk rises

In 2024, Powell used the same stage to open the door to rate cuts. That year, job numbers were weakening and two-year yields dropped hard after his speech. It gave traders the green light to bet on easier policy. Now, the labor market is once again showing cracks.

But inflation is also back in the picture. The Fed’s July meeting minutes, released Wednesday, revealed that officials are still worried about rising prices as new tariffs take effect. High asset prices are also making some at the Fed think that easing isn’t necessary yet.

That’s why Powell has held back this year. The Fed has kept rates steady and is waiting to see if inflation picks up even more before making a move. But many bond investors believe that labor weakness is stronger than inflation fears.

Glenmede’s Pride believes the Fed will ultimately move in line with the market. “The Federal Reserve has a bias that when nothing looks like it’s falling apart, you tend to deliver what you have managed to build into market expectations at this point in time,” he said. That view gives weight to the idea that Powell may let the market lead the way, as long as the economy doesn’t fall apart.

Still, not everyone is treating Powell’s words as gospel. Strategists at BMO Capital Markets laid out a plan depending on how the market reacts.

If Powell leans dovish but doesn’t give clear confirmation, they plan to sell into any rally in the two-year note. If the market takes a slightly hawkish comment too seriously and thinks a cut is off the table, they’ll buy the dip.

“We’d look to fade a rally in the two-year sector in the event that Powell is dovish, but doesn’t seal the deal on a September rate cut,” the strategists said. “Conversely, we’d be dip-buyers if the market misconstrues a hawkish comment as an indication that a September rate cut is not in the cards.”

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