GM. This is Milk Road Macro, the newsletter that hits harder than Powell’s Jackson Hole mic drop (if he decides to drop one).

Here’s what we got for you today:

• ✍️ Here’s why Jackson Hole is a big deal

• 🎙️ The Milk Road Macro Show: K-Shaped Economic Crisis: Why the Economy’s Split Between Boom and Doom w/ Craig Shapiro

• 🍪 BofA says US megacap dominance may be over

HERE’S WHY JACKSON HOLE IS A BIG DEAL

This week we’ll hear from Federal Reserve Chair Jerome Powell - and it could be a very important moment for markets.

He’s been fending off constant pressure from President Trump to cut rates.

But he hasn’t completely closed the door on rate cuts.

The next official Fed rate decision will not happen until September 17.

But this week, Powell will be speaking at Jackson Hole - an event steeped in Fed lore.

And this one short speech could set the tone for the rest of 2025.

So, why is Jackson Hole so important?

What is the backdrop heading into Jackson Hole?

And how will asset markets respond?

Let’s take a look…

Why is Jackson Hole so important?

This week, it’s the annual Economic Policy Symposium at Jackson Hole, Wyoming.

This sounds mega boring, and it is – it’s the yearly central bank jamboree where global central bankers gather to rub shoulders and pat each other on the back.

But one short monetary policy speech from Fed Chair Jerome Powell at 10am ET on Friday (August 22) could have massive implications for asset markets.

Investors from around the world will be hanging on every syllable uttered by Powell.

But why is this?

Because Jackson Hole is the place where the Fed often signals big policy pivots and offers the market key forward guidance.

It’s staged away from the stuffy surroundings of Washington DC and in front of the dramatic backdrop of the Rocky Mountains.

It’s like a holiday for central bankers, where they let loose and go wild.

Previous Fed Chair Ben Bernanke used Jackson Hole in 2010 to hint at a second round of Quantitative Easing before making it official.

Previous Fed Chair Janet Yellen laid the groundwork there in 2015 for the first rate hike after the financial crisis.

And Powell’s no different – he loves grabbing attention and headlines at Jackson Hole too.

In 2022, his famous “there will be pain” speech was followed by the Fed continuing to relentlessly hike rates in the months following, which indeed ended up causing a lot of pain for asset markets.

And in 2024, he signalled a sudden and somewhat unexpected dovish pivot, laying the groundwork for the start of this current rate-cutting cycle in September 2024, fueling asset markets higher.

You could arguably say that Jackson Hole is more important than an official Fed rate decision.

So what is the backdrop heading into Jackson Hole?

The Fed has an official dual policy mandate - “maximum employment” (low unemployment) and “price stability” (low, or at least “controlled”, inflation).

But the Fed is currently in a bit of a pickle.

On the one hand, there are some signs that the US labor market could be weakening.

A couple of weeks ago, a concerning US jobs report showed the lowest three-month jobs growth since the 2020 pandemic.

This data potentially points to a need to cut rates.

But on the other hand, inflation looks like it's heading in the wrong direction.

CPI (consumer prices) has been ticking up in recent months, and PPI (producer prices) came in scorching hot at 0.9% month-on-month last week (more than 10% annualized!).

Powell’s stuck between a slowing jobs market and stubborn inflation, and that exact dilemma is front and center in our latest podcast with macro investor Craig Shapiro. He gets into the Fed’s no-win setup, the political heat coming into Jackson Hole, and why this speech could end up being Powell’s big “mic drop” moment.

This data potentially points to a need to keep rates steady.

Despite the inflation worries, the market is increasingly confident that a weakening job market has opened the door to a more dovish tone from the Fed chair and rate cut expectations have soared in recent weeks.

Traders are currently pricing an 83% probability of a 25bps rate cut in September.

And four rate cuts in total are currently expected by the market over the next 12 months.

But, crucially, Powell is yet to “officially give his blessing” to this market pricing of rate cuts.

In recent months he’s remained cautious and has not given the all-clear for a restart of rate cuts, yet.

But he’s now running out of time and needs to make a decision soon.

This means, at Jackson Hole, he could “lean in” to market expectations (dovish), or he could push back on market expectations (hawkish).

“The Fed’s under a tremendous amount of pressure”, said Scott DiMaggio, head of fixed income at AllianceBernstein. 

“They’re a little bit behind, but they’ve been waiting to see the impact of tariffs and what it’s doing to the economy and to inflation.”

What will happen at Jackson Hole and how will asset markets react?

You would expect to see some hedging by market participants leading into Jackson Hole as investors load up on downside protection.

So risk asset markets may see some weakness as we edge closer to the speech.

Then, on Friday, the speech could be a big “clearing event” - serving as a key inflection point for framing Fed policy moving forward.

However, it’s anybody’s guess as to what Powell will actually say.

Both the concerning job report and the hot PPI report were released after the most recent Fed meeting.

So the market will be hyperfocused on how Powell is currently weighing the risks of inflation and the labor market.

Here’s a speculative “cheat sheet” on what could happen at Jackson Hole, looking at three possibilities:

1/ Dovish Powell 

Powell strongly signals that the Fed will restart cutting rates in September and potentially more cuts will follow, elevating labor market concerns and downplaying inflation concerns.

This scenario will likely see big market moves everywhere. Equities will probably like this, particularly interest-rate sensitive companies like many small-caps. The dollar would probably get hammered. Bitcoin and gold would likely move higher on currency concerns.

2/ Hesitant and indecisive Powell

Powell essentially delivers the speech version of “sitting on his hands” - emphasizing that the Fed is still “watching the data closely”.

This would be neutral but I would expect this would generally be mildly bullish for risk assets as a whole, with little change to expectations of rate cuts and hedges unwound. It would somewhat validate the easing everyone's expecting (no significant pushback on current market pricing) without going too far.

3/ Hawkish Powell

Powell directly pushes back on market expectations for rate cuts, elevating inflation concerns and downplaying labor market concerns.

This would likely see a big repricing of rate cut expectations. Risk asset markets like equities and bitcoin would probably fall in this scenario. The dollar would also likely strengthen.

Wrapping up

One short speech from one man could set the tone for the rest of the year.

Powell at Jackson Hole could make or break the current “Fed will restart easing in 2025” expectations that have underpinned recent risk asset strength.

Or alternatively, it could actually end up being a snoozefest.

Powell still has a little bit of breathing room and might end up not saying a whole lot in Wyoming.

After Jackson Hole, we still have one inflation report and one jobs report before the next official Fed rate decision in September.

“He has the capacity to do something that’s market-moving, but I’m not necessarily sure that he’s going to”, said Kelsey Berro, executive director for fixed income at JPMorgan Asset Management.

A poll on X from Bob Elliott, of Unlimited Funds, suggests X users think Powell will “give no guidance” at Jackson Hole.

But because of the history of Jackson Hole, and how the Fed has often used it as a key forward guidance event, it needs to be watched closely.

That’s it for this edition - catch you for the next one.

BITE-SIZED COOKIES FOR THE ROAD 🍪

President Trump has urged Russian President Putin to meet with Ukrainian leader Zelenskiy in a one-on-one summit as a push to end the Russia/Ukraine conflict intensifies. The call comes after Zelenskiy and other European leaders met with Trump at the White House for constructive talks on Monday.

Google has upped its stake in bitcoin miner TeraWulf to 14%. TeraWulf is one of many bitcoin miners transitioning to provide AI infrastructure, and its Lake Mariner data center will be one of the largest in the US.

Bank of America analysts say the era of US megacap stock dominance “may be done”. They believe higher inflation and Federal Reserve rate cuts “should support a broadening of the S&P 500”.

RATE TODAY’S EDITION

MILKY MEME 🤣

ROADIE REVIEW OF THE DAY 🥛