The 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 Fedâs annual meet-up in Jackson Hole, Wyoming. Chair Jerome Powell will give a speech thatâs expected to set the tone for whatâs coming next.Â
Heâs got to walk a fine lineâlaying out a plan without locking the Fed into a course that could backfire.
Powellâs balancing act
The Fed got caught with its pants down before, underestimating the inflation surge. They called it âtransitory,â and that mistake is still haunting them. As Quincy Krosby, the chief global strategist at LPL Financial, puts it:Â
âThey were late to what they were supposed to be doing. They donât want to make a mistake on this side of the equation.â
Whatâs 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.Â
Wholesale prices barely moved in July, spending was stronger than expected, and layoffs have mostly leveled out. But itâs not all sunshine and rainbowsâhousing is still a mess.Â
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 inflationâs 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 Fedâs track record isnât perfect, and as Krosby said:Â
âThis is not an exact science. Itâs probably as much an art form as it is a science.âÂ
The longer the Fed waits to cut, the more risks theyâre 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.Â
No one wants an emergency rate cutâitâs much better if itâs a measured response to inflation coming down.
But not everyone agrees. Former Fed Vice Chair Richard Clarida, who was all about the âtransitoryâ inflation idea back when he was in the game, thinks the Fed will cut rates in September.Â
He said that the August nonfarm payrolls report, expected in early September, will be a big deal. Even though Powell says the Fed is âdata dependentâ and not just chasing every little data point, Clarida thinks that:
âIf itâs a disastrous report, negative payrolls and a big rise in unemployment, then weâll go 50.â
So yeah, itâs 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?