This week, all eyes will be on Jerome Powell!

Federal Reserve Chairman Powell and his colleagues face a completely different dilemma this week at the annual economic symposium in Jackson Hole, Wyoming than they did a year ago.

Last August, the main concern for the Fed was how long interest rates needed to stay at 20-year highs to curb inflation. Now, with new signs of cooling inflation and a slowing job market, the question is no longer whether the Fed will cut rates, but by how much?

Investors will closely watch Powell's speech scheduled for Friday night at 10 p.m. Beijing time, where he will have the opportunity to provide clues about the Fed's future monetary policy path.

He explicitly stated at the July 31 press conference that a 25 basis point rate cut next month is possible, but he downplayed the possibility of taking larger actions, such as a 50 basis point cut. He said:

"We think the timing is coming, and if we get the data we hope to get, then we might lower the policy rate at the September meeting."

Traditionally, Fed chairs use their speeches in Jackson Hole to convey important, long-term policy information.

Former Fed Chair Bernanke proposed in his 2010 speech that the Fed could stimulate economic growth by buying bonds, a tool also known as quantitative easing (QE).

In Powell's 2018 "Stars Aligned" speech, he outlined his thinking on the natural real interest rate, one that neither stimulates nor suppresses growth. This may be one of his most memorable speeches as chair.

In 2022, Powell, in a speech shorter than usual, pledged to do everything possible to bring inflation back to the Fed's 2% target and warned that higher rates could bring pain and higher unemployment, leading to market crashes.

"We will keep at it until we are sure the job is done," he said at the time.

Last August, Powell reiterated firmly that the Fed was "prepared to further raise rates" and committed to lowering inflation regardless.

"While inflation has come down from its peak - which is welcome progress - it is still too high," he said last year.

However, with more encouraging inflation data coming out in the U.S., strengthening the Fed's progress, his tone on Friday may be very different.

Some Fed watchers expect Powell not to make specific forecasts for September, but to remind everyone that the Fed will now focus more on employment issues as the job market weakens.

"He wants to be very transparent, but frankly, I don't think he knows yet," said Luke Tilley, a Wilmington Trust bond portfolio manager. "You might see them more focused on making sure the unemployment rate doesn't fall further."

The Fed has a dual mandate of maintaining price stability and full employment. With the rise in unemployment, the latter has become increasingly important and has put greater pressure on the Fed to act. In July, the U.S. unemployment rate rose to 4.3%, the highest level since October 2021 Tilley expects Powell to discuss the natural interest rate, also known as the "neutral rate," which helps the Federal Reserve understand the actual constraints of its monetary policy.

"The discussion on what is neutral and what is restrictive will provide an opportunity for the Fed to say, 'Hey, we are cutting rates, but let's be clear, we are just easing off the brakes slightly, not accelerating,'" Tilley said.

Former Kansas City Fed President George, who once chaired the Jackson Hole conference, expects Powell to do something similar to what he did in his "starlight speech" in 2018.

"I expect him to seize on this topic and then step back, broaden the perspective," George said. "I want to hear in this speech what Powell thinks the past four years have told us about inflation dynamics and the labor market."

But George also acknowledges that everyone will be looking for clues about what actions the Fed will take in September during the speech. She said market expectations seem "more aggressive than what the outlook for economic growth above potential shows."

"I think the Fed will continue on a gradual path, but even if they start cutting rates, they will closely monitor the progress of inflation," George said.

Fed watchers may have to wait until after this week to get more confirmation about what might happen in September, with particular importance placed on the August nonfarm payrolls report scheduled for release on September 6.

Any surprises in the report could alter the Fed's thinking. The July nonfarm payrolls report fell short of expectations, triggering the most severe stock market sell-off of the year and leading some Fed watchers to bet on a 50 basis point rate cut.

However, over the past week, as new reports proving the resilience of the economy eased concerns about a significant slowdown in the U.S. economy, traders have been reducing these bets.

The likelihood of the Fed cutting rates by 25 basis points instead of 50 basis points at the September 17-18 meeting is now close to 75%, whereas just a few weeks ago, the odds were evenly split