Jerome Powell, Chairman of the Federal ReserveThe Federal Reserve is heading into what could be its toughest week in a long time. The central bank is about to face a series of challenges that will have everyone from Wall Street to Main Street paying close attention.
Things kick off with the Fed’s annual meet-up in Jackson Hole, Wyoming. Chair Jerome Powell will give a speech that’s expected to set the tone for what’s coming next.
He’s got to walk a fine line—laying out a plan without locking the Fed into a course that could backfire.
Powell’s balancing act
The Fed got caught with its pants down before, underestimating the inflation surge. They called it “transitory,” and that mistake is still haunting them. As Quincy Krosby, the chief global strategist at LPL Financial, puts it:
“They were late to what they were supposed to be doing. They don’t want to make a mistake on this side of the equation.”
What’s at stake here is how the Fed reacts now that inflation seems to be cooling off. Recent data shows consumer prices have slowed down to their weakest pace in over three years.
Wholesale prices barely moved in July, spending was stronger than expected, and layoffs have mostly leveled out. But it’s not all sunshine and rainbows—housing is still a mess.
Construction starts and permits hit a four-year low in July. Wages are going up, but not fast enough to outpace inflation by much. And imports are showing inflation’s ugly face, rising at their highest rate since December 2022.
Rate cuts when?
Despite the mixed bag of data, most people in the market think the Fed should start cutting interest rates soon. The Fed’s track record isn’t perfect, and as Krosby said:
“This is not an exact science. It’s probably as much an art form as it is a science.”
The longer the Fed waits to cut, the more risks they’re taking. Right now, traders are betting on a quarter-point rate cut in September, with more cuts likely in November and December.
The big fear is that the Fed might have to slash rates because of a full-blown crisis, like the labor market collapsing or another economic disaster.
No one wants an emergency rate cut—it’s much better if it’s a measured response to inflation coming down.
But not everyone agrees. Former Fed Vice Chair Richard Clarida, who was all about the “transitory” inflation idea back when he was in the game, thinks the Fed will cut rates in September.
He said that the August nonfarm payrolls report, expected in early September, will be a big deal. Even though Powell says the Fed is “data dependent” and not just chasing every little data point, Clarida thinks that:
“If it’s a disastrous report, negative payrolls and a big rise in unemployment, then we’ll go 50.”
So yeah, it’s still all about the numbers. With the markets on edge and the economy teetering between stability and chaos, Powell and his team have to get it right this time. No pressure, right?
