Key Moment! Federal Reserve "Megaphone": Powell may set the tone for the Fed's future actions tonight!

On Friday, Nick Timiraos, a Wall Street Journal reporter known as the "megaphone" of the Federal Reserve, pointed out in his latest article that Fed Chairman Powell will outline a rough roadmap for officials on how to take action in the next phase of interest rate adjustments.

Two years ago, when officials gathered in Wyoming for the Jackson Hole Economic Symposium, they were raising interest rates at an astonishing pace to curb high inflation, like climbing a mountain. Last year, officials thought they had reached the peak but were not sure. This year, they are preparing to "descend," but are uncertain about the speed of descent.

Timiraos pointed out that one challenge Powell and his colleagues face is that while inflation has fallen to levels roughly as expected last year, the degree of economic weakness is far less than expected. While not a major problem, it is still puzzling.

For example, in June 2023, most officials believed that as inflation fell, by the end of 2024, the unemployment rate would rise to above 4.4%. By June 2024, their views on inflation were largely consistent, but almost everyone believed that the unemployment rate would not exceed 4.3% by the end of the year. In July, the unemployment rate reached this level.

Due to cooling in the labor market indicating that policies may have become too tight, most officials are prepared to begin lowering rates by a percentage point in a traditional manner at the September meeting. They are unsure how fast to cut rates afterwards. The question is: by how much are current rates above the "neutral" level that neither stimulates nor restrains economic activity?

Timiraos stated that the Fed faces two paths in the coming months. Under one path, officials can cut rates by 25 basis points at each of the next few meetings, then accelerate or decelerate the pace of rate cuts based on the economic performance early next year.

If the economy experiences a more significant slowdown, they can cut rates by a substantial 50 basis points, bringing rates to around 3% in the spring.

The challenge for the Fed is that officials typically have a high threshold for significant rate cuts. They may seek "permission" either from unexpectedly weak economic data, as in 2001, or signs of significant pressure in the credit markets, as in 2007.

When the Fed conducted a series of rate cuts in 1995, 1998, and 2019, it opted for more cautious measures each time, cutting rates by only 25 basis points.

Minneapolis Fed President Kashkari said in a recent interview:

"Unless we start to see a faster deterioration in the labor market, I might be in the camp of 'let's take a more cautious approach' because we don't know where the destination is."

This "permission" mechanism puts the Fed in a dilemma. Officials need to see evidence of overly tight policies, but by the time that happens, it is often harder to avoid a recession. Powell's speech on Friday will be carefully analyzed to see if he is weighing the pros and cons between reducing inflation and preventing further rise in the unemployment rate.

Timiraos concluded that Powell is currently at a crucial moment in deciding the fate of the US economy. He hopes to lower inflation without causing a recession, making the next few months crucial for him