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At the Jackson Hole Symposium on Friday the Federal Reserve Chair Jerome Powell is expected to hint at a widely anticipated rate cut at the September FOMC meeting. This comes in the wake of the core CPI data from last week, which showed a month-over-month increase of 0.165%, marking the third consecutive reading below 2% annualized. Citi economists stated in a recent note that the question is no longer whether the Fed will initiate a rate-cutting cycle, but rather how rapidly and significantly it will unfold. Citi anticipates 50bp rate cuts in September and November, but Powell is expected to refrain from making specific policy decisions, stating once more that these are “data dependent.”

How Powell addresses the shift in risks, with concerns about the labor market now taking precedence as inflationary pressures ease will likely be a key part of his speech. Even before the unemployment rate increased to 4.3 percent and core inflation remained subdued at the FOMC meeting on July 31, Powell had begun to emphasize that the balance of risks was shifting away from price stability and toward employment. According to Citi economists, the most recent data, which demonstrate a slowing of inflation and a faster-than-anticipated softening of the labor market, provides Powell with two potential justifications for a more aggressive pace of rate cuts. To begin, he might argue that as inflation falls, the real policy rate—the nominal rate that has been adjusted for inflation—effectively rises, necessitating a decrease in nominal rates in order to prevent monetary conditions from becoming overly restrictive. Second, Powell may cite the faster labor market loosening as a reason to bring policy rates closer to neutral sooner.

Powell is likely to maintain his belief that the U.S. economy will avoid a recession despite stronger-than-expected retail sales and a decline in initial jobless claims. “With the ‘Sahm rule’ all but triggered, Powell’s intuition from July that downside risk to the employment mandate predominates should now be even stronger,” the Citi economists observe. They think Powell will use his speech in Jackson Hole to show that policy is “well positioned” to respond to changing data, suggesting that rates could be reduced significantly. In order to avoid being perceived as “panic,” the speech may also lay the groundwork for larger rate cuts by framing them within a distinct macroeconomic justification.