Powell's Jackson Hole speech is being prepared while the stock market's "fragile" rally is at risk.

Market watchers widely expect Federal Reserve Chair Jerome Powell to set the tone for a September interest-rate cut in his speech at the Kansas City Fed’s annual Jackson Hole Economic Symposium on Friday. However, if the speech goes in a different direction, it could threaten the stock market’s recent bounce. Powell is due to speak on the economic outlook at 10 a.m. Eastern time, following a precedent where Fed chairs almost always give a keynote speech during the high-profile annual gathering that regularly attracts top U.S. and global central bankers. The event runs from Aug. 22 to 24 in Grand Teton National Park in Wyoming.

Although Fed chairmen do not usually intentionally set expectations about impending interest-rate decisions at Jackson Hole, Powell's remarks this year will be closely watched.

Considering that traders revised their expectations for the Fed's rate path at a period of intense market volatility, this year's conference makes sense. Two days after the Fed's most recent meeting, a significant sell-off in the stock market was sparked by a weaker-than-expected July jobs report. The next jobs report is scheduled to be released the day before the Fed's communications blackout period begins ahead of its September meeting. This arrangement restricts the power of policymakers to shape market expectations, as BNP Paribas economists have pointed out.

In retrospect, the stock market's response to Fed leaders' statements at Jackson Hole has generally been subdued, despite the fact that most of them were encouraging. 

Over the previous two decades, the S&P 500 SPX

Dow Jones Market Data shows that throughout the conference, 0.20% witnessed an average return of 0.4%. In the month after the conference, the index saw an average gain of 0.1%, and in the three months that followed, it saw an average return of 1.8%. 

However, Fed chairs have occasionally said things that have caused an excessive response. On August 26, 2022, the S&P 500 had a 3.4% decline as Powell dashed investor expectations for a speedy end to the Fed's rate-hiking program. 

Most observers believe Powell will lay the groundwork for a rate reduction in September of this year. James Knightley, chief international economist at ING, predicts that Powell will emphasize that inflation is trending upward, providing the Fed greater assurance that it will meet its 2% target. According to Knightley, Powell may be indicating that the central bank may concentrate more on achieving its second mandate, which is to maximize employment, as a result of the inflation slowdown.

Knightley told MarketWatch over the phone, "I think he is going to say something like, considering the way the unemployment rate is going, it could make sense that we do start to decrease rates a little sooner." 

The head strategist at Interactive Brokers, Steve Sosnick, expressed concern that investors might have had higher expectations for Powell's speech. 

"What if Powell just states that we do not need to drastically cut interest rates, but we might want to move them a little lower?" stated Sosnick. This is particularly concerning because, according to the CME FedWatch Tool, fed-funds futures traders are already factoring in rate reduction from the central bank at each of its three upcoming meetings this year.

Powell might be sending a message that, even while the Fed might think about cutting rates even more if required, it will keep moving slowly until the data start to paint a more dire picture of the economy, according to Sosnick.

In any event, Sosnick believes Powell's remarks may jeopardize the market's recovery from the selloff earlier this month. The equity market is currently at a point where negative economic data is viewed as simply negative news because recession fears have lately increased. In the past, negative news was frequently seen favorably by the market since it could lead to a rate cut by the Fed.

"I am advocating for a degree of prudence prior to Jackson Hole," Sosnick declared. "In particular, the stock market may be more brittle the further ahead we rally."

After a week of gains, U.S. markets concluded with the Dow Jones Industrial Average DJIA

0.24% higher by 1,162.22 points, or 2.9%, over the previous five days, reaching 40,659.76. During the week, the S&P 500 increased 3.9%, but the Nasdaq Composite COMP

5.3% gained by 0.21%. According to Dow Jones Market Data, all three indexes saw their biggest weekly percentage advances since the week ending Nov. 3.

In addition to Powell's address at Jackson Hole, investors will be following the Fed's July meeting minutes, which are set to be issued on Wednesday at 2 p.m. Eastern time, and the first weekly jobless claims data, which is expected to be released on Thursday morning.

The preliminary annual benchmark revision to the Bureau of Labor Statistics' March payrolls survey will be made public on Wednesday as well. It is important to watch that release because, as ING's Knightley pointed out, if the figures indicate a significant downward revision to the prior payroll numbers, it might indicate that the labor market is not doing so well. 

Knightley stated, "The Fed would have to admit that the labor market has not been as strong as maybe the official data has been portraying." "Once more, this serves as rationale for them to reconsider the storyline and determine whether to emphasize the necessity of loosening monetary policy."