All eyes will be on Federal Reserve Chair Jerome Powell when he delivers the keynote speech at the central bank's summer symposium in Jackson Hole, Wyoming, on Friday.
Just one year ago, when Powell spoke during this same time, he sent the stock market careening with warnings of economic "pain" that might result from the Fed's relentless fight against inflation.
"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," he said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
Instead, inflation has shown mostly steady signs of declining, falling from a peak of 9.1% to 3.2% over the past year – even as the labor market has remained surprisingly resilient.
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Now, upon Powell's return to the annual consort of central bankers in the Wyoming resort town, investors will be closely analyzing his speech clues about what comes next in the Fed's inflation fight. The Fed chief may disappoint onlookers who are hoping for signs that the aggressive tightening campaign is finally coming to an end.
"Powell will leave the door open for another rate hike, and [repeat that] future decisions will remain data dependent," said Joe Kalish, chief global macro strategist at Ned Davis Research. "With another batch of economic reports due before the next FOMC meeting, there is no need for him to tip his hand. The big debate will be how long the Fed will remain restrictive. In the meantime, the Fed will keep with a tightening bias."
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The Fed is scheduled to meet three more times this year, in September, November and December. While most investors agree the central bank will hold rates steady at the upcoming September meeting, there is a growing expectation among traders that the Fed will approve another rate hike in November, according to the CME Group's FedWatch tool, which tracks trading.
Government data released earlier this month showed that inflation ticked higher in July; it marked the first acceleration in the headline figure in more than a year, underscoring the challenge of taming high inflation.
Other parts of the report also pointed to a slower retreat for inflation. Core prices, which exclude the more volatile measurements of food and energy, climbed 0.2%, or 4.7% annually. Both core and headline inflation remain well above the Fed's 2% target rate.
Powell will likely express concerns about "inflation not falling fast enough" and indicate that the "market should not expect any cuts through at least the first part of 2024," according to John Vail, chief global strategist at Nikko Asset Management.
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Policymakers have raised interest rates sharply over the past year, approving 11 rate hikes in hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.
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Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending.
Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit, to auto loans and credit cards have also spiked.
