The Fed might choose slow rate cuts, lowering rates by a quarter point at each of its forthcoming meetings and modifying the pace based on early next year’s state of the economy, he added. Should the economy fall more drastically, the Fed might then take further significant half-point cuts to get rates near 3% by spring 2024.

Challenges in Implementing Larger Rate Reductions

Timirao noted that one of the main difficulties is that the Fed usually has a high threshold for applying a larger rate reduction. Such a choice would demand either a large drop in economic data, as in 2001, or major stress in credit markets, as shown in 2007. The Fed adopted a more cautious approach in past instances, such as 1995, 1998, and 2019, cutting tiny quarter-points.

That puts the Fed in what Timirao termed a “Catch-22” scenario. Officials must have compelling proof that the present rules are unduly restrictive if they are to speed rate reductions. But by the time such data shows up, a recession could be too late to prevent.

Market Anticipation Ahead of Powell’s Speech

Powell’s speech will be keenly examined for hints regarding whether the Fed is thinking about changing its strategy, thereby balancing the necessity to lower inflation with the possibility of increasing unemployment. Powell’s remarks might indicate how the Fed intends to negotiate “the mountainside descent” of increased interest rates while attempting to preserve economic stability as market players await direction.

With inflation and the cost of living taking front stage, the Fed’s benchmark lending rate, which ranges from 5.25 to 5.50 percent, currently marks a 23-year high and is lowering demand in the biggest economy in the world ahead of November’s presidential elections.

“He will likely signal that a rate cut is coming soon,” said Deutsche Bank’s top US economist, Matthew Luzzetti. “However, I think he will not indicate the probable size of that rate cut.”

Luzzetti of Deutsche Bank said that Powell is unlikely to come out forcefully in favor of any move on Friday, and the decision to cut by 25 or 50 basis points would depend on how the data comes in over the next month and, most significantly, what the next employment report looks like. A weaker job data would also probably increase the likelihood of a bigger half-point fall, he said.

Following the Jackson Hole conference, on September 6, the next job data will be released before the Fed’s next meeting in mid-September.

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