• Goldman Sachs says Jerome Powell’s speech at Jackson Hole on Friday could deliver some surprises.

• It could not be the first time he used the event as a likelihood to reset investors’ expectations.

• Markets are eyeing rate cuts of 100 basis points between now and the tip of the 12 months.

All eyes are on Jerome Powell’s speech on the Federal Reserve’s Jackson Hole Symposium on Friday, and Goldman Sachs says the central bank’s chairman could still surprise investors despite their confidence inside the Fed’s path for the remaining of the 12 months.

It could not be the first time Powell used his Jackson Hole speech as a likelihood to reset the market’s expectations.

In 2022, when inflation was hitting a 40-year high, Powell delivered a temporary but direct eight-minute speech that reinforced the Fed’s path to raising rates of interest to combat inflation although the stock market was within the midst of a painful bear market.

Bond yields surged, and the S&P 500 lost nearly 8% inside the week after Powell’s hawkish Jackson Hole speech.

But with inflation almost under control and the labor market showing signs of degradation, Powell could strike a much different tone on Friday.

And according to Goldman Sachs, there are quite a few ways the Fed boss could catch markets off guard.

“Possible dovish surprises could include a more concerned tackle the labor market or any suggestion that the high level of the fed funds rate is inappropriate in light of the progress made on inflation,” David Mericle, a Goldman economist, said in a note on Tuesday.

Such an event would likely be bullish for the stock market, as it’d reinforce the concept the Fed will begin to chop rates of interest at its Federal Open Market Committee meeting in September and that the bar for a cut of greater than 25 basis points or a string of consecutive cuts is lower than most expect.

The CME FedWatch tool suggests investors see 100 basis points of rate cuts through the remaining of this 12 months.

Alternatively, Powell could shock markets to the downside if he adopts a more hawkish tone than investors expect.

“A possible hawkish surprise is probably highlighting instead that broad financial conditions are still quite easy, which could imply that the high level of the funds rate, while perhaps unnecessary, is not going to be an urgent problem,” Mericle said.

Mericle ultimately expects Powell to be more dovish in his Jackson Hole speech, given the weak July jobs report and up to this point data that indicates inflation is falling closer to the Fed’s long-term goal of two%.

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The recent downward revision to employment growth of 818,000 jobs also doesn’t help the Fed’s case for remaining hawkish.

“This might mean expressing a bit more confidence inside the inflation outlook and putting a bit more emphasis on downside risks inside the labor market,” the note said. “Powell can also reiterate that the FOMC is watching the labor market data rigorously and is well positioned to support the economy if obligatory.”

Goldman Sachs also gave a rundown of Powell’s Jackson Hole speeches and their impact on Treasury yields since he became the Fed chairman in 2018.

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