The Federal Reserve opts for a gradual approach to interest rate cuts.

The Federal Reserve of the United States is at a crucial moment in its monetary policy, where expectations of interest rate cuts have become almost unanimous. As September approaches, central bankers appear to be aligning around a gradual reduction strategy in an attempt to balance the need to control inflation while maintaining a relatively stable labor market. During the recent symposium in Jackson Hole, several Fed members advocated for a methodical reduction in rates, making it clear that no drastic cuts are anticipated in the short term. Inflation, which still remains above the 2% target, is a critical point in the Fed's internal debate. Although there are signs of weakness in the labor market, the lack of massive layoffs suggests that monetary policymakers do not see the need to act aggressively. This context has led the Fed to consider a gradual approach, which has historically been its modus operandi in times of uncertainty. Brett Ryan, a senior economist at Deutsche Bank AG, highlights that gradualism allows the Fed to carefully assess the economy in response to its decisions. This approach involves quarter-point rate cuts, which would provide moderate relief without risking an escalation in inflation. However, the absence of Chairman Jerome Powell in this discourse has raised questions about whether his vision is fully aligned with that of his colleagues. Powell has emphasized his commitment to reducing inflation without compromising the health of the labor market. In his speech, he did not outline a specific timeline for upcoming decisions, but his willingness to adopt a more aggressive approach if the labor situation deteriorates indicates that he is weighing options. The Fed's goal remains to stabilize prices, but Powell has also stated that a severe cooling of employment is not sought. Gradualism has also become a crucial topic of discussion, as the Fed has adopted this approach in most recent economic cycles. However, in crisis situations, such as during the pandemic, the Fed took drastic measures, bringing rates to zero in an effort to stabilize the economy. The experience of Paul Volcker in the 1980s serves as a reminder that strict monetary policy may be necessary, but it is also risky. Economists warn that while the labor market shows some signs of weakness, price pressures persist. Unemployment has unexpectedly risen, and although companies are not yet laying off en masse, they have significantly reduced hiring. This has led some economists to question the effectiveness of maintaining a restrictive policy and to advocate for greater flexibility in the Fed's decisions. Despite the internal debate over rate cuts, Powell appears to be more cautious than some of his colleagues. Economists from EY-Parthenon argue that unless labor conditions worsen drastically, it is most likely that the Fed will opt for a 25 basis point cut at its next meeting. This, they argue, would allow for a more careful adjustment in monetary policy, giving the economy time to adapt. The additional challenge facing the Fed is determining how far they can reduce rates without overheating the economy. The notion of a neutral interest rate becomes vital in this context, as it implies finding a balance where the Fed neither hinders nor stimulates the economy. Some within the Fed suggest that, in a post-pandemic environment, this level could be higher, further complicating the strategy of gradualism. The inherent uncertainty of the current situation makes the idea of a gradual approach even more appealing to central bankers. This implies that decisions are based not only on data analysis but must also consider market reactions and the economy as a whole. The Fed is aware that any movement in rates must be cautious and well-founded. As monetary policymakers continue to consider their options, the future of the Fed's gradual approach remains under intense scrutiny. The Fed's ability to adapt to changes in the economic landscape, without losing sight of its inflation target, will be crucial for the success of its strategy in the coming months and years. Meanwhile, markets and citizens will remain alert to the signals emitted by central bankers, in a context where economic stability is more crucial than ever.