TOKYO \u2014 It\u2019s arguably been decades since a single US Federal Reserve speech was as important to Asia as Jerome Powell\u2019s will be on Friday (August 22) at a gathering of central bankers in Jackson Hole, Wyoming.<\/p>\n
That\u2019s 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.<\/p>\n
Along with dismissing the anemic 73,000 increase in July payrolls as \u201cfake news,\u201d Trump fired the head of the Bureau of Labor Statistics<\/a> (BLS). Trump\u2019s fellow Republicans piled on the BLS, too, over the May and June monthly totals being revised down by a combined 258,000 jobs.<\/p>\n 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.<\/a><\/p>\n Either outcome would cheer Asia, boosting confidence that the globe\u2019s biggest economy won\u2019t slide into recession or face fresh financial turmoil.<\/p>\n The Kalshi prediction market assigns a\u00a068% chance<\/a>\u00a0of a 25-basis-point cut in September, while the odds on no action are 30%. There\u2019s only a 3% chance of a bigger move.<\/p>\n Yet there\u2019s 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.<\/p>\n And the minutes of the Federal Open Market Committee\u2019s July 29-30 meeting, released Wednesday, show that a majority of the 18 policymakers in attendance \u201cjudged the upside risk to inflation as the greater of these two risks.\u201d<\/p>\n \u201cTariffs are feeding through unevenly and will continue to push inflation higher in the coming months,\u201d said\u00a0Michael Pearce, economist at Oxford Economics. \u201cIt will be difficult for policymakers to tease out one-off tariff effects from longer-lasting inflationary pressures.\u201d<\/p>\n 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\u2019s independence.<\/p>\n Trump has also demanded that Goldman Sachs replace its chief economist<\/a> 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.<\/p>\n 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\u2019s term, which ends on January 31, 2026.<\/p>\n 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.<\/p>\n 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<\/a> or coax him to resign.<\/p>\n Though the Supreme Court has warned Trump against even trying, Powell\u2019s job security would be in jeopardy as rarely before.<\/p>\n On Tuesday, Trump posted: \u201cCould somebody please inform Jerome \u2018Too Late\u2019 Powell that he is hurting the housing industry, very badly? People can\u2019t get a mortgage because of him. There is no Inflation, and every sign is pointing to a major rate cut.\u201d<\/p>\n A day later, on Wednesday, Trump widened his campaign<\/a> to include Fed Governor\u00a0Lisa Cook, alleging she was involved in mortgage fraud. Trump posted on social media that \u201cCook must resign,\u00a0now!!!\u201d\u00a0<\/p>\n Cook pushed back: \u201cI 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.\u201d<\/p>\n US Senator\u00a0Elizabeth Warren, a Democrat, said the Trump administration \u201cshould not weaponize the federal government to illegally fire independent Fed Board members.\u201d<\/p>\n She added that \u201canyone 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.\u201d<\/p>\n It\u2019s this scenario that worries Asian governments<\/a>. 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.<\/p>\n The disruption to Asia\u2019s 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.<\/p>\n Asia is also home to the largest holdings<\/a> of US Treasury securities, with at least US$2.5 trillion in the coffers. Japan alone holds $1.15 trillion; China holds $756 billion.<\/p>\n The problem with Trump and Bessent arguing that there\u2019s 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.<\/p>\n Overall producer prices rose 0.9% month on month, the most in three years. Trump\u2019s tariffs, meanwhile, are indeed inflationary, as Goldman Sachs rightly says.<\/p>\n 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\u2019t do, next month. Layered on top of that question is how Trump responds.<\/p>\n The last month hasn\u2019t gone well for Trump. Perhaps seeking to deflect attention from domestic scandals, including his handling of the\u00a0Jeffrey Epstein\u00a0files<\/a> issue, Trump hosted a hastily arranged summit with Russian President Vladimir Putin in Alaska on August 15.<\/p>\n 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\u2019s aftermath is unlikely to help.<\/p>\n 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\u2019s biggest troubles with his supporters than a big, beautiful pact with Xi\u2019s China<\/a>.<\/p>\n It doesn\u2019t matter much if it\u2019s 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.<\/p>\n 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\u2019s $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.<\/p>\n \u201cIf Trump got his way,\u201d said Christian Keller, the chief global economist at Barclays Bank, \u201cinflation expectations could spin out of control.\u201d\u00a0<\/p>\n Powell\u2019s Jackson Hole speech could fill in many of the blanks for global investors, particularly stock punters<\/a>. Julian Emanuel, economist at Evercore, predicts Powell \u201cis likely to indirectly signal a 25 basis-point rate cut\u201d next month.<\/p>\n Economists at Eastspring Investments argue that, in Friday\u2019s coming speech, \u201cPowell is likely to continue emphasizing that the September FOMC rate decision will hinge on employment and inflation data in August.\u201d<\/p>\n Citi Research economist Andrew Hollenhorst thinks Powell will hint at a cut, but won\u2019t go beyond that.<\/p>\n \u201cWe 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,\u201d he said. \u201cWe 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.\u201d<\/p>\n Bank of America economists note that \u201cif Powell wants to lean against a September cut, he could say that\u00a0the policy stance remains appropriate given the data at hand. We note\u00a0that\u00a0this phrasing would\u00a0allow him to retain\u00a0the optionality of cutting\u00a0if 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.\u201d<\/p>\n Ian Lyngen, a strategist at BMO Capital Markets, said that \u201cas the market readies for Powell\u2019s speech at Jackson Hole<\/a>, we\u2019ll argue that the biggest risk for Treasuries is if the Fed chief chooses to throw cold water on the widely anticipated September rate cut.\u201d<\/p>\n He added that \u201cit\u2019s worth acknowledging that the front-end of the [yield] curve is vulnerable to a bearish correction if Powell doesn\u2019t deliver on the degree of dovishness that the market is currently anticipating.\u201d<\/p>\n Nowhere will the reaction to what Powell says, and doesn\u2019t, signal on Friday be greater than here in Asia. Suffice to say, it\u2019s going to be a long weekend for market players bracing for the smartphone alert.<\/p>\n