Powell will set the tone for rate cuts next week, and the market's most pressing questions may not be answered

Krishna Guha, Vice Chairman of Evercore ISI, said in a client note that Powell will set the tone for future monetary easing policies, leaning towards "active" rather than "passive" on rate cuts. Specific details will have to wait until the Fed announces August employment data on September 6.

Guha stated, "The current focus of the Fed is on employment data rather than inflation data, and the upcoming employment data will determine how the Fed actively proceeds with rate cuts."

It is widely expected that Powell will continue the tradition of Fed chairs and provide monetary policy clues in his opening speech at the Fed's Jackson Hole meeting next Friday.

US stocks have recovered much of the ground lost since the sharp decline in August, and are still on a steady rise this year.

Despite the panic in early August partly due to the disappointing July jobs report and the sharp unwinding of popular yen carry trades, stock investors seem optimistic about the prospects of continued economic growth.

In contrast, the federal funds rate futures market has priced in a series of significant rate cuts, indicating concerns that the Fed may need to take aggressive action to address the sharp economic weakness.

Scott Helfstein, Director of Investment Strategy at Global X, said in a report, "Overall CPI is below 3% for the first time since March 2021. Chairman Powell should celebrate the victory at Jackson Hole and try to convince the market to cut rates by 25 basis points in September. Currently, the market is pricing in a nearly 50 basis point rate cut in September, but the Fed is unlikely to achieve this outcome."

After the CPI data was released on Wednesday, rate futures traders were indeed abandoning bets on a 50 basis point rate cut in September. According to CME's FedWatch tool, they currently see the probability of a significant rate cut at around 43%, down from about 53% on Tuesday and 69% a week ago. Traders believe the probability of a 25 basis point rate cut is 57%.

Two former Fed officials said on Wednesday that based on their current understanding, the Fed may cut the federal funds rate by 25 basis points at the September meeting.

Former Kansas City Fed President George said, "I don't think there will be a larger rate cut in September." She said that while the July CPI report was good, it "still shows high inflation." Overall, the economy still appears resilient, providing time for policy adjustments.

Former Fed Vice Chairman Blinder agreed, saying his basic judgment is that unless the August jobs report looks "terrible," there will be a 25 basis point rate cut in September.

Blinder stated that if the economic situation deteriorates from now until the Fed's next policy meeting in September, policymakers will take larger rate cut measures. However, he added that neither he nor the Fed expects this to happen Just 12 days ago, after the U.S. Department of Labor released a weaker-than-expected July employment report, the market began pricing in a 50 basis point rate cut by the Federal Reserve in September, and even expectations for an emergency rate cut during the meeting surged. Traders are concerned that the surge in the unemployment rate will increase the risk of an economic recession.

However, subsequent comments from Federal Reserve officials indicate that they are more optimistic about the economic outlook.

The July CPI data released on Wednesday is seen by most economists as good enough to prompt a rate cut by the Federal Reserve in September. The magnitude of the rate cut will depend on the employment data. Guha outlined in the report how he believes the Federal Reserve will respond to the August employment data:

If the August employment report is better than last month (which is Guha's basic expectation), the Federal Reserve will cut rates by 25 basis points at each of the remaining three meetings this year, and "as needed" cut rates by 25 basis points in the first quarter of next year.

If the August employment data continues to show this new weak trend, the Federal Reserve is likely to cut rates by 50 basis points in September and November.

If the data shows that the job market is collapsing, the Federal Reserve will cut rates by 200-250 basis points before December.

He concluded that the Federal Reserve only needs one very reliable report this year to design a plan for two 25 basis point rate cuts