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FOMC minutes highlight Powell's challenge at Jackson Hole

Division within the Federal Reserve may hamper Chairman Jerome Powell's ability to give a clear sense of the central bank's next move during his speech in Jackson Hole, Wyo.

Powell is scheduled to speak Aug. 23 at the Kansas City Fed's annual conference, but his speech may cause volatility in markets given some investors' expectations that the Fed will ease policy substantially this year.

"We think the market may be disappointed by the Fed's unwillingness to explicitly commit to cut rates as much as the markets have priced in," Priya Misra, head of global rates strategy at TD Securities, wrote in a note to clients.

Futures markets see a roughly 83% probability that the Fed will cut its benchmark rate at least twice more this year, according to the CME Group's FedWatch tool.

But Fed officials are divided over what they should do following their 25-basis-point cut on July 31, according to minutes of the central bank's July meeting. Those supporting the rate cut saw it as a chance to protect against rising risks to the U.S. economy stemming from trade tensions and weaker global growth.

A couple of Fed officials, though, advocated for a more aggressive 50-basis-point cut, partly to provide a boost to sluggish inflation figures.

Several other Fed officials opposed the rate cut and preferred keeping rates unchanged, though not all of them are voters this year on the rate-setting Federal Open Market Committee. The two FOMC voters who dissented at the meeting, Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, have said in recent interviews that they still think the economy is healthy and does not need rate cuts.

Powell will have to navigate those divisions during his Jackson Hole speech, and therefore he may hint at further rate cuts without committing to any action, analysts say.

"I don't think you'll get ... really anything pertinent from this speech other than 'we stand ready to take action as needed,'" said Craig Elder, senior fixed income analyst at Baird.

The Fed chief's speech will likely "briefly acknowledge recent developments but say little or nothing substantial about the outlook and near-term monetary policy," Larry Meyer, a former Fed governor and president of Monetary Policy Analytics, wrote in a note to clients. But Meyer added that he did not expect Powell to "lean against the market's expectations" for another 25-basis-point cut at the next FOMC meeting in September.

Instead, Powell's speech will be largely academic and focus on longer-term issues that are puzzling central banks around the world.

The theme of this year's Jackson Hole conference, which draws top economists and central bankers from around the world, will be "Challenges for Monetary Policy," according to the Kansas City Fed.

In the years since the financial crisis, some central banks, including the Fed, have been able to raise interest rates, while others have delayed in doing so or have been unable to remove the monetary policy stimulus they implemented.

The divergence in interest rates across the world affects capital flows between countries, and changes in rates in one country "can create spillovers through financial markets affecting others," the Kansas City Fed said in a preview of the conference.

The potential ceiling for interest rates also appears to be significantly lower than it was in past decades, giving the Fed and other central banks less room to cut interest rates when they respond to a downturn.

The Fed held a research conference in Chicago in June focused on potential strategies that would give the central bank more recession-fighting ammunition. Powell may provide some updates on possible changes to the Fed's monetary policy framework and communications, but the Fed has said it will share its decisions in the first half of 2020.

Fed officials discussed some of those issues at their July meeting and generally agreed that their deliberations "would take some time and that the process would be careful, deliberate, and patient," minutes of the meeting showed.