As Fed Chairman Jerome Powell prepares to deliver his highly anticipated speech at the Jackson Hole symposium today, the Fed is reportedly considering two different paths for monetary policy in the coming months, according to views shared by journalist Nick Timiraos, who is often considered the “spokesperson for the Fed.”
The Fed could opt for gradual rate cuts, cutting rates by a quarter point at each of its upcoming meetings and adjusting the pace depending on how the economy performs early next year, he said. But if the economy declines more sharply, the Fed could consider larger, half-point cuts to bring rates closer to 3% by spring 2024.
A major challenge, Timiraos said, is that the Fed typically has a high threshold for implementing larger rate cuts. Such a decision would require either a significant decline in economic data, as in 2001, or significant stress in credit markets, as seen in 2007. In previous cases, such as 1995, 1998 and 2019, the Fed took a more cautious approach, implementing a series of small quarter-point cuts.
That creates what Timiraos called a “Catch-22” situation for the Fed. To accelerate rate cuts, officials need convincing evidence that current policies are overly restrictive. But by the time such evidence emerges, it may be too late to avoid a recession.
Powell’s speech will be closely analyzed for clues about whether the Fed is considering a shift in approach, balancing the need to curb inflation with the risk of rising unemployment. As market participants await guidance, Powell’s comments could point to how the Fed plans to navigate “the mountainside descent” of higher interest rates while trying to maintain economic stability.
*This is not investment advice.