TOKYO — It’s arguably been decades since a single US Federal Reserve speech was as important to Asia as Jerome Powell’s will be on Friday (August 22) at a gathering of central bankers in Jackson Hole, Wyoming.
That’s because much has changed since US central bank officials last met to discuss interest rate policy on July 29-30. There has been, for example, a notable downshift in US job growth, one that quickly enraged President Donald Trump.
Along with dismissing the anemic 73,000 increase in July payrolls as “fake news,” Trump fired the head of the Bureau of Labor Statistics (BLS). Trump’s fellow Republicans piled on the BLS, too, over the May and June monthly totals being revised down by a combined 258,000 jobs.
The data, of course, swung the debate about Fed policy from steady to a rate cut on September 17, when Powell & Co. announces its next monetary decision. The only question, most economists think, is whether the Fed eases rates by 25 or 50 basis points.
Either outcome would cheer Asia, boosting confidence that the globe’s biggest economy won’t slide into recession or face fresh financial turmoil.
The Kalshi prediction market assigns a 68% chance of a 25-basis-point cut in September, while the odds on no action are 30%. There’s only a 3% chance of a bigger move.
Yet there’s also reason for Asia to brace for no rate cut. In recent speeches and comments, many Federal Reserve officials appear to be prioritizing inflation risks over fears of recession.
And the minutes of the Federal Open Market Committee’s July 29-30 meeting, released Wednesday, show that a majority of the 18 policymakers in attendance “judged the upside risk to inflation as the greater of these two risks.”
“Tariffs are feeding through unevenly and will continue to push inflation higher in the coming months,” said Michael Pearce, economist at Oxford Economics. “It will be difficult for policymakers to tease out one-off tariff effects from longer-lasting inflationary pressures.”
Yet the pressure for a rate cut is on. Since late July, Trump has ratcheted up demands on Fed Chair Powell, threatening to reduce the central bank’s independence.
Trump has also demanded that Goldman Sachs replace its chief economist for saying tariffs are inflationary. And Treasury Secretary Scott Bessent has called for 150-175 basis points of easing, a shocking breach of policy protocol.
By mid-September, Trump should have a #MAGA voice on the Fed. Recently, he announced plans to name Stephen Miran, his like-minded Council of Economic Advisors chairman, to the Fed board. Miran would serve out the rest of outgoing Governor Adriana Kugler’s term, which ends on January 31, 2026.
Miran could be the third dissenting voice on the Fed in favor of a more aggressive Trump-style rate cut. The July meeting saw two governors dissent from the majority for the first time in more than 30 years.
Should Powell opt to leave rates unchanged next month, the pressure against him could be extreme. At that point, Trump would almost certainly resume his earlier effort to fire Powell or coax him to resign.
Though the Supreme Court has warned Trump against even trying, Powell’s job security would be in jeopardy as rarely before.
On Tuesday, Trump posted: “Could somebody please inform Jerome ‘Too Late’ Powell that he is hurting the housing industry, very badly? People can’t get a mortgage because of him. There is no Inflation, and every sign is pointing to a major rate cut.”
A day later, on Wednesday, Trump widened his campaign to include Fed Governor Lisa Cook, alleging she was involved in mortgage fraud. Trump posted on social media that “Cook must resign, now!!!”
Cook pushed back: “I have no intention of being bullied to step down from my position because of some questions raised in a tweet. I do intend to take any questions about my financial history seriously as a member of the Federal Reserve and so I am gathering the accurate information to answer any legitimate questions and provide the facts.”
US Senator Elizabeth Warren, a Democrat, said the Trump administration “should not weaponize the federal government to illegally fire independent Fed Board members.”
She added that “anyone can see that for months now, President Trump has been scrambling for a pretext to intimidate or fire Chair Powell and members of the Federal Reserve Board while blaming anyone but himself for how his failed economic policies are hurting Americans.”
It’s this scenario that worries Asian governments. As Trump intensifies his campaign against the Fed, the dollar could plunge and US Treasury yields would almost certainly skyrocket. The collateral damage to Asian markets and economies could be extreme.
The disruption to Asia’s trade-reliant economies would be painful indeed. The dollar is the linchpin of finance and trade invoicing. This puts Asia directly on the frontlines of extreme volatility in the global reserve currency.
Asia is also home to the largest holdings of US Treasury securities, with at least US$2.5 trillion in the coffers. Japan alone holds $1.15 trillion; China holds $756 billion.
The problem with Trump and Bessent arguing that there’s no inflation is how counterfactual such arguments are. In July, core consumer price inflation, which excludes food and energy, rose 3.1% year on year.
Overall producer prices rose 0.9% month on month, the most in three years. Trump’s tariffs, meanwhile, are indeed inflationary, as Goldman Sachs rightly says.
Hence the high drama and political intrigue surrounding September 17. Here in Tokyo, the Bank of Japan is somewhat captive to what the Fed does, or doesn’t do, next month. Layered on top of that question is how Trump responds.
The last month hasn’t gone well for Trump. Perhaps seeking to deflect attention from domestic scandals, including his handling of the Jeffrey Epstein files issue, Trump hosted a hastily arranged summit with Russian President Vladimir Putin in Alaska on August 15.
Trump has been ridiculed on all sides for securing neither a ceasefire nor anything approaching a peace process. Instead, Trump seemed to give Putin political cover to intensify his war in Ukraine. If Trump had hoped for a bump in his sliding approval rating, the Alaska summit’s aftermath is unlikely to help.
At the same time, Chinese leader Xi Jinping is playing a serious game of hard to get on a US tariff deal. This raises the stakes. Nothing would clear up many of Trump’s biggest troubles with his supporters than a big, beautiful pact with Xi’s China.
It doesn’t matter much if it’s a watered-down, minimalist agreement that changes little about trade flows. Just so long as Trump can do a press conference and spin the results to his favor.
The consequences for the US and the entire world would be significant. If investors lose faith that the Fed and Trump are serious about fighting inflation and paying down America’s $36 trillion and rising mountain of debt, they could ultimately turn their backs on US government bonds, which have long been the safest investments out there.
“If Trump got his way,” said Christian Keller, the chief global economist at Barclays Bank, “inflation expectations could spin out of control.”
Powell’s Jackson Hole speech could fill in many of the blanks for global investors, particularly stock punters. Julian Emanuel, economist at Evercore, predicts Powell “is likely to indirectly signal a 25 basis-point rate cut” next month.
Economists at Eastspring Investments argue that, in Friday’s coming speech, “Powell is likely to continue emphasizing that the September FOMC rate decision will hinge on employment and inflation data in August.”
Citi Research economist Andrew Hollenhorst thinks Powell will hint at a cut, but won’t go beyond that.
“We expect Chair Powell to confirm market pricing for a return to rate cuts in September, but stop short of explicitly committing to cut at that meeting,” he said. “We do not expect he will comment on the size of the cut, but it is safe to assume the base case at the moment is for a 25 basis point cut.”
Bank of America economists note that “if Powell wants to lean against a September cut, he could say that the policy stance remains appropriate given the data at hand. We note that this phrasing would allow him to retain the optionality of cutting if the August jobs report is very weak. Of course, he might also telegraph a cut by saying it is appropriate to move to a less restrictive policy stance.”
Ian Lyngen, a strategist at BMO Capital Markets, said that “as the market readies for Powell’s speech at Jackson Hole, we’ll argue that the biggest risk for Treasuries is if the Fed chief chooses to throw cold water on the widely anticipated September rate cut.”
He added that “it’s worth acknowledging that the front-end of the [yield] curve is vulnerable to a bearish correction if Powell doesn’t deliver on the degree of dovishness that the market is currently anticipating.”
Nowhere will the reaction to what Powell says, and doesn’t, signal on Friday be greater than here in Asia. Suffice to say, it’s going to be a long weekend for market players bracing for the smartphone alert.
Follow William Pesek on X at @WilliamPesek
