Federal Reserve Chairman Jerome Powell gets the opportunity this week to settle the markets after a comment he made nearly three weeks ago that sent shares falling.
The central bank met the investor's expectations with a quarter-point interest rate cut on July 31 that bore all the markings of an insurance-style move, plus some indications that further moves were possible if warranted.
However, it was Powell's news conference afterwards that dampened the mood.
Answering a question about the Fed's future intentions, he characterized interest rates as just a "mid-cycle adjustment," another in a series of memorable quotes from Powell since October last year that have left Wall Street in skyscraper mode. In this case, the market took the statement as a possible indicator of a cut and made for cut ahead.
So when he gives his annual speech Friday at the Jackson Hole, Wyoming symposium, Powell will have the opportunity if not to go back the "mid-cycle" rating to at least provide some additional explanation of what it means.
One way might be to point out that an adjustment can still mean more cuts.
"We believe Powell will characterize the Fed as in the process of an ongoing mid-cycle adjustment in interest rates that are incomplete (not one and done) and may extend beyond the original rate (not two cuts max)," ISI- economists from Evercore Krishna Guha and Ernie Tedeschi said in a note to clients.
Changing the narrative to one where the Fed is still open to future cuts, although Powell may also indicate that he does not see the recession in the field may be the key to calming a very unstable market sentiment.
Following the statement on mid-cycle adjustment, markets sold aggressively, taking down the Dow industries by 333 points before trading closed on July 31
Powell's words are important because monetary policy has remained standing. jangled nerves in light of the ongoing US-China customs battle.
It was "never done and done"
In fact, a day after the Fed meeting, the markets were in recovery mode, making up most of the previo us today's loss. On the afternoon of August 1, President Donald Trump announced his intention to impose tariffs on all Chinese imports and send shares straight down.
The unpredictability of the trade war, combined with low inflation and a declining global economy, makes the Fed's position particularly uncertain.
"We believe the message from Jackson Hole will be that the committee is open to extending the mid-cycle adjustment further than it previously assumed if this seems justified based on a wide range of developments," Guha and Tedeschi wrote. They added that "the intended announcement in July was never one-and-done."
In fact, they see a chance of the Fed becoming even more aggressive if the economic warning signs become more prominent.
In such a scenario, economists see a Fed as "swinging to super aggressive interest rate cut mode" in an effort that would eventually see a cut in the stock price down to zero and possibly several rounds of asset purchases – quantitative easing – "if necessary . "
On Monday, Trump sent out a pair of tweets asking for similar action. He asked the Fed to cut interest rates by a full percentage point and restart its money printing program for the crisis.