Bond Market Rate Cut Bets Face Powell's Reckoning at Jackson Hole

Bond markets are gearing up for Jerome Powell’s highly anticipated speech on Friday, with most investors betting that the Federal Reserve chair will hint at an interest rate cut as early as next month.

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Powell is set to speak at 10 a.m. New York time during the Fed’s annual Jackson Hole symposium in Wyoming—a stage he has often used to deliver market-shifting announcements. Investors will be listening closely for any sign that Powell might challenge—or confirm—the current expectations for rate cuts.

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In recent sessions, interest-rate swaps have pulled back slightly after hawkish remarks from other Fed officials combined with mixed economic data. Still, market pricing suggests about a 70% probability of a quarter-point cut in September and roughly 50 basis points of easing over the course of 2025.

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Pressure on Powell has been mounting from President Donald Trump and other White House figures to resume cutting rates. The central bank has held its benchmark range steady at 4.25% to 4.50% since December, and this Jackson Hole gathering may serve as a moment for Powell to reaffirm the Fed’s independence from political influence.

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If Powell adopts a hawkish stance, it could push shorter-term Treasury yields higher. Such a tone might also disrupt some recent sizable options bets that are banking on a deep rate cut next month and a total of 75 basis points in reductions before year-end.

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“There’s a decent chance the chair takes a tougher line and signals he isn’t eager to slash rates,” said Tom di Galoma, managing director at Mischler Financial Group.

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To maintain flexibility, Powell is expected to stress that any decision in September will hinge on incoming employment and inflation figures, which are due early next month.

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“Powell won’t want to commit to a firm path for rate cuts just yet,” said Jason Pride, head of investment strategy and research at Glenmede. “He’ll probably lean toward suggesting that the economic backdrop has softened enough to warrant considering a cut.”

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Such comments would likely keep Treasury yields locked in their current range, with the two-year note hovering near 3.75% and the 10-year holding around 4.30%. This month, shorter-term yields on two- and five-year notes have already slipped 11 to 16 basis points, holding on to gains fueled by soft July employment data. Treasuries were little changed in early Asian trading on Friday.

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At last year’s Jackson Hole meeting in 2024, Powell signaled the beginning of an easing cycle amid evidence of a weakening labor market, sending two-year yields tumbling as traders’ bets on cuts were validated. Fast forward to this year: the job market is again losing steam, but inflation risks have increased compared to August 2024.

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According to minutes from July’s Fed meeting released Wednesday, policymakers worried that inflation could climb further as tariffs filter through the economy. High asset prices were also noted as a reason to hold off on aggressive cuts. So far in 2025, the Fed has kept rates unchanged, with Powell emphasizing the need to gauge the full inflationary impact of tariffs before shifting policy.

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Still, most bond investors believe labor market weakness will outweigh inflation concerns. “I expect Powell to hint once more at monetary easing,” said Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management. “While this month’s inflation report showed some heat, it’s probably not enough to derail the more dovish voices on the committee.”

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If upcoming data strengthens expectations for easing, Fed officials are likely to support that view, Pride added. “Historically, when the situation isn’t deteriorating dramatically, the Fed tends to deliver what the market has priced in,” he noted.

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Strategists at BMO Capital Markets recommend a tactical approach following Powell’s remarks. “If Powell sounds dovish but avoids fully committing to a September cut, we’d look to fade a rally in the two-year sector,” they advised. “On the flip side, if the market overreacts to a hawkish comment by assuming no September cut, we’d be buyers on the dip.”

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