Don't get your hopes up! Economist: Powell will definitely "play tai chi" again on Friday

Economists say the Federal Reserve will outline a gradual rate cut plan starting from the mid-September meeting at Jackson Hole, Wyoming. The two-day discussion will begin on Friday.

The Fed's plan is in stark contrast to the aggressive rate cuts expected by market participants after the weak July jobs report released earlier this month. Derek Holt, Deputy Chief Economist at the Canadian Imperial Bank of Commerce, said, "The theme of this meeting may be 'gradual'."

Economists say Fed Chair Powell will only give a vague green light for future rate cuts in his speech on Friday. Prior to his speech, other Fed officials have begun to outline possible policy paths.

San Francisco Fed President Daly supports a gradual pace of rate cuts. She said, "Gradual does not mean weak, slow, or lagging - it just represents caution."

Aditya Bhave, Senior US Economist at Bank of America Securities, believes that gradual means the Fed will cut rates twice this year by 25 basis points each time, and then cut rates once each quarter next year by 25 basis points each time.

The Fed's benchmark interest rate currently stands at 5.25%-5.5% and has remained at this level since July last year.

Derivatives market traders do not agree with this so-called "gradual" view. They believe the Fed will cut rates by 100 basis points by December and by 200 basis points by June next year. Bhave said, "It is currently difficult to predict market expectations."

He stated that there are two main scenarios for the US economy. The first is that the economy continues to grow at a rate of 2% with job growth continuing. The other is an economic downturn, which would lead to rapid rate cuts. He said, "The market must weigh these two scenarios on average, so they will fall somewhere in the middle."

Doug Porter, Chief Economist at BMO Capital Markets, said he expects the Fed to go through a series of rate cuts, bringing the benchmark rate down to the 4% range, then slowing the pace of cuts until rates reach 3% in 2026, which is a neutral rate level. This means the Fed will cut rates a total of 9 times.

Carl Tannenbaum, Chief Economist at Northern Trust, said Powell will convey another message to investors, telling them "not to overreact to the data".

The early-month non-farm payroll report shook global financial markets. Tannenbaum said, "I think the reaction to the employment report is one of the worst market overreactions I've seen in a long time, with markets eagerly accepting the idea of an economic downturn based on just one data point. They are just looking for a narrative, and they created one based on employment data."

In the brief period following the release of the employment report, there were discussions about a series of 50 basis point rate cuts and emergency rate cuts by the Fed. Over the past two weeks, emotions have calmed downTannenbaum said, Powell will emphasize that the economy remains very strong and hint at a 25 basis point rate cut in September. He said:

"Powell will also use some language to indicate that this magnitude of rate cut may be appropriate at the moment, unless unforeseen events occur, considering a larger rate cut may be premature."

Tannenbaum expects Powell to also emphasize that the Fed has not abandoned its concerns about inflation. He expects the Fed to cut rates three times this year, each time by 25 basis points. However, regarding next year, he said, "The outlook for next year is still too uncertain to make accurate predictions, but I don't think there is a need for significant rate cuts."