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The chair will lay the groundwork for the central bank’s next phase of monetary policy. It will be the highest-stakes event for the economy and markets this fall.

The most consequential event this fall won’t be the U.S. election, a war in the Middle East, or even baseball’s World Series. For most Americans, it will be the first reduction in U.S. interest rates in more than four years. An expected rate cut by the Federal Reserve in mid-September won’t change the price of eggs or businesses’ hiring plans overnight, but it will signal the start of the next phase of the monetary-policy cycle, with important consequences for the economy, financial markets, and consumers.

The most consequential event this fall won’t be the U.S. election, a war in the Middle East, or even baseball’s World Series. For most Americans, it will be the first reduction in U.S. interest rates in more than four years. An expected rate cut by the Federal Reserve in mid-September won’t change the price of eggs or businesses’ hiring plans overnight, but it will signal the start of the next phase of the monetary-policy cycle, with important consequences for the economy, financial markets, and consumers.

If the Fed eases insufficiently in this cycle, the economy could tip into a recession. If it cuts rates too quickly, it could reignite inflation, not to mention a speculative frenzy in the markets. But if Fed Chair Jerome Powell and his colleagues thread the needle just right, the central bank could execute a fabled soft landing that would keep the economy growing at a just-right rate without the threat of recession or pronounced inflation.

There is a decent chance, this time, that the Fed will succeed.

Powell’s keynote address on Aug. 23 at the Fed’s annual Jackson Hole Monetary Policy Symposium will lay the groundwork for the coming shift in rates, spurred by the deceleration of inflation in the past two years toward the central bank’s 2% annual target and policymakers’ desire to get ahead of a softening labor market. Expect Powell to reiterate that the Fed’s decisions are data-dependent, while confirming Fed officials’ dovish stance.

July’s consumer- and producer-price-index readings, released this past week, set the stage for another benign inflation print on Aug. 30, when the government releases last month’s personal consumption expenditures price index, the Fed’s preferred inflation gauge. The year-over-year CPI inflation rate fell to 2.9% last month, the first reading below 3% since the spring of 2021. Recent monthly readings are at a pace that would total 2% or less if they continue for a year.

The jobs and inflation reports for August, to be released in early September, will be the last major economic releases ahead of the Federal Open Market Committee meeting on Sept. 17-18. Markets are betting that the Fed will cut the federal-funds rate by at least 25 basis points, or a quarter of a percentage point, at that meeting, bringing the target range down to 5.00%-5.25%.

The Fed last lowered rates in March 2020, at the start of the Covid-19 pandemic, to a range of 0%-0.25%, before embarking on a hiking cycle in March 2022 to cool inflation, which peaked several months later at 9% year over year. All told, Fed officials raised rates 11 times, to a target range of 5.25%-5.50%, which they have maintained since July 2023.

With a September rate cut all but assured, the debate on Wall Street increasingly is shifting to what the easing cycle will look like thereafter. The Fed’s latest Summary of Economic Projections, released at the conclusion of the FOMC meeting in June, implies a quarter-point cut per quarter through the end of 2026, culminating in a longer-term fed-funds rate of 2.8%. Officials’ next so-called dot plot of rate projections will be released after the September FOMC meeting.

Futures markets are betting on a more aggressive, front-loaded easing cycle. Current pricing implies the greatest odds of a full percentage point of cuts before the end of 2024, followed by another percentage point of cuts in 2025.

Importantly, the path of the rate-cut cycle will depend on why the Fed is cutting. Will it lower interest rates to rescue the economy from a recession, or merely normalize rates that have grown too restrictive? The U.S. economy’s so-called neutral rate of interest—a rate that neither stimulates nor restricts economic activity—would be the end point in the normalization scenario. Economists’ estimates of that unmeasurable rate tend to fall in the 3%-3.5% range today, well above where it is thought to have been in the years preceding Covid.

Interest-rate expectations have been on a roller-coaster ride this year, soaring or swooping with nearly every data release or Fed pronouncement. Expect another loop-the-loop or two before 2024 draws to a close.

In January, futures markets were pricing in more than 1.5 percentage points of rate cuts in ’24, based on the prior quarter’s deceleration in price growth. By the spring, after a series of hot inflation reports, many traders, investors, and even Barron’s saw no likelihood of a rate cut this year. But by August, after interest-rate expectations had taken a few more hairpin turns, tamer inflation readings and evidence of slowing job growth had markets betting on a series of cuts through the fall.

Soft-landing wagers are prevalent on Wall Street, and not without reason.

The economy isn’t in or on the precipice of a recession. Conditions have cooled off from overheated postpandemic levels, but jobs remain plentiful, consumers are spending, and economic output is growing. Real U.S. gross domestic product rose at a 2.8% annualized rate in the second quarter, and the Federal Reserve Bank of Atlanta’s GDPNow estimate puts growth at 2.0% in the third quarter.

As for the labor market, the unemployment rate climbed to 4.3% this July from 3.4% in April 2023. That is still lower than during 75% of months in the current century, and employers continue to add jobs even as the unemployment rate rises. In other words, the recent increase has been driven primarily by the growth of the labor pool, not layoffs.

“I don’t think the labor market in its current state is a likely source of significant inflationary pressures,” Powell said in his post-FOMC news conference on July 31. “So, I would not like to see material further cooling in the labor market.”

That said, the labor market recently gave economists and investors a scare. On Aug. 2, the Bureau of Labor Statistics reported a gain of 114,000 in July’s nonfarm payrolls, far below the past year’s average monthly addition of 215,000 jobs. The uptick in the unemployment rate, from 4.1% in June, triggered the Sahm Rule recession indicator, which posits that a recession has begun once the three-month moving average of the unemployment rate exceeds its low from the prior year by at least half a percentage point. But even Claudia Sahm, the former Fed economist who codified the rule, doesn’t think a downturn is imminent.

“The expansion remains intact, and the job market right now is in a fine place, but in order to keep it there, we think policy restriction needs to be dialed back somewhat,” says Wells Fargo senior economist Sarah House.

Monetary policy famously works with “long and variable lags,” as the economist Milton Friedman said in the 1950s. That is motivating the Fed to get ahead of further labor-market weakness by cutting rates before unemployment spikes further. The Powell Fed was widely panned for being late to hike rates at the front end of the cycle, declaring inflation “transitory.” Presumably, it is keenly aware of the reputational risk of being too late to cut them now.

“It makes sense to take a risk-management approach here,” says Evan Brown, head of multi-asset strategy at UBS Asset Management. “If it turns out they cut rates too soon and we get an inflation acceleration, they can deal with that down the road. But it’s much harder to interrupt the negative spiral of rising unemployment and falling consumer spending if they’re late on that.”

Based on futures market pricing as relayed by the CME FedWatch tool, the odds of a quarter-point rate cut at the September FOMC meeting stood at 73% Friday, although they have fluctuated widely in the past month. Tom Porcelli, chief U.S. economist at PGIM Fixed Income, favors a larger, half-percentage-point cut.

“Fed policy is calibrated for notably higher inflation than we have today,” says Porcelli. “The inflation half of the Fed’s mandate has essentially been met, while the employment side is showing some deterioration. It’s time for them to act.”

Porcelli also argues for a front-loaded cutting cycle. Wells Fargo economists expect half-point cuts at the Fed’s September and November meetings, then another quarter-point reduction in December.

But conditions in the economy and markets would need to deteriorate further for the Fed to deliver a jumbo cut in September. “There are two main paths to a [half point] cut in September,” says Goldman Sachs chief economist Jan Hatzius. “The first is another downside surprise in the next jobs report. The second is renewed sharp tightening in financial conditions and/or a rise in financial stress that creates greater economic risks.”

Hatzius expects the Fed to cut rates by a quarter of a percentage point at all three of its remaining meetings in 2024, as do Morgan Stanley’s chief U.S. economist, Ellen Zentner, and Rick Rieder, BlackRock’s chief investment officer of global fixed income.

A half-point cut in September could be counterproductive, says Antulio Bomfim, head of global macro for the global fixed income team at Northern Trust Asset Management. “It could send a message that policymakers are panicking about the economy, that they are seeing something that we are not, and then it becomes a self-fulfilling, perverse cycle,” he says.

For the real economy, the difference between a quarter-point and half-point reduction in the fed-funds rate in September isn’t make-or-break. But it is psychologically significant in the message it sends to markets and consumers.

Don’t expect a formal plan from the Fed, either at Jackson Hole or subsequently. Rather, rate cuts will be data-dependent, with decisions made on a meeting-by-meeting basis, at least initially. Promising to cut by too much too soon would risk a repeat of the 1970s experience of resurgent inflation after the Fed took its foot off the monetary brakes.

“The joke goes that ‘economists spend half of their time forecasting and the other half of their time explaining why their forecast didn’t work out,’ ” says Bomfim. “It would be really hard for policymakers to provide precise forward guidance in an environment like this, at an inflection point for the economy.”

Richard Bernstein, CEO and CIO of Richard Bernstein Advisors, advocates that the Fed take a wait-and-see approach and delay any rate cuts. He points to rising container shipping rates and still-elevated wage growth as indications that inflation might not be vanquished. “The liquidity junkies on Wall Street have forgotten the role of the central bank,” Bernstein says. “Where, exactly, is the tightening of credit in the financial system? Where is the stress on bank balance sheets? The answer is, it’s nowhere to be seen.”

To be sure, the market has already done some of the Fed’s work on easing. Bond yields, which move inversely to prices, have tumbled since the spring, particularly yields on bonds with shorter maturities. The yield on the two-year U.S. Treasury note has dropped by nearly a percentage point since late April to about 4%, as markets have priced in rate cuts this year and next.

“At the front end of the yield curve, there’s almost no juice left, with [futures] pricing in more than four cuts this year,” says BlackRock’s Rieder. “There isn’t a lot of money left to be made there unless you really think the economy is going to slow dramatically, which I don’t.”

The BlackRock Flexible Income exchange-traded fund (ticker: BINC), which Rieder manages, has a weighted average maturity of five years, in the so-called belly of the yield curve. The $3.7 billion ETF is heavily weighted in high-yield corporate bonds and securitized products such as collateralized loan obligations, where payouts are more attractive and credit risk is modest in a no-recession scenario, Rieder says. It has a 6.5% yield and an average rating of BBB+, in the middle of investment grade.

For equities, a still-expanding economy paired with declining interest rates is as close to a Goldilocks backdrop as investors can get. It would mean more earnings growth for more companies and a boost to valuations from lower yields.

“The equity market tends to cheer on the idea of Fed cutting, but it depends on why the Fed is cutting,” says PGIM’s Porcelli. “If the tone is that they’re cutting because recession risks are rising, that tends not to bode too well for equities.”

Fed officials, economists, and policymakers will descend on Jackson Hole, Wyo., in just a few days to discuss this year’s wonky but unusually relevant symposium theme, “Reassessing the Effectiveness and Transmission of Monetary Policy.”

The coming months could see much more policy evaluation.

Whether the U.S. economy enjoys a soft landing will depend largely on the Fed’s prowess and consumers’ and corporations’ response. As for investors, remember to fasten your safety harness and keep your arms and legs inside the ride at all times.