The focus of the Federal Reserve's work has changed, will there be at least one "aggressive rate cut" this year?

Wall Street is now full of confidence, believing that the Federal Reserve will cut interest rates in September. Federal Reserve Chairman Powell's speech at Jackson Hole proved that a rate cut is indeed imminent. However, a combination of economic data and hints from Federal Open Market Committee (FOMC) members, including Powell himself, has led some analysts to start doubting whether the rate cut will be larger than previously expected. They all agree that Powell's emphasis on "risk management" is shifting.

Institutions such as Bank of America and Vanguard predict that the Federal Reserve will cut rates by 25 basis points next month, but there is also a growing call to cut rates by 50 basis points.

For example, JPMorgan Chase stated this week that it expects the Federal Reserve to cut rates by 100 basis points before the end of the year. With only three meetings left this year, this means that at least one rate cut must be 50 basis points, in addition to two cuts of 25 basis points each.

As market expectations shift, the volatile data continues to make the FOMC's dual mandate more difficult to interpret. This dual mandate includes lowering inflation and achieving full employment. With inflation steadily cooling, the market's focus is shifting to the labor market.

A report released this week by the U.S. Bureau of Labor Statistics shows that unemployment rates in metropolitan areas are rising while demand for workers is weakening. Meanwhile, the Bureau of Labor Statistics stated earlier this month that productivity is increasing.

JPMorgan Chase wrote in a report this week, "Concerns about the U.S. economy entering a recession are escalating, yet financial markets remain optimistic about the future performance of the business sector, creating a strange combination." The bank added that the Federal Reserve is transitioning from a gradualist stance to being concerned about cutting rates too late.

Chicago Fed President Evans expressed this concern earlier this month in an exclusive interview with Fortune magazine.

He cautioned, "As we maintain rates at such high levels, but with inflation continuing to decline, we are actually tightening rates." Therefore, he urged the Federal Reserve to consider: "Under what circumstances do we really need such tight policies?"

He explained, "The answer is, only when necessary, only when worried about the economy overheating, does policy need to be so tight. But in my view, now is not a sign of an overheating economy. Therefore, I believe we need to recognize that such a tight state should not last too long, otherwise we will have to consider another task, which is that the employment situation will worsen."

The Federal Reserve is reevaluating risks

Whether experts are pricing in a 25 basis point or 50 basis point rate cut for the next Federal Reserve meeting, one thing they agree on is that the FOMC is changing its strategy.

Powell said last week at Jackson Hole, "The time for policy adjustment has come. The direction forward is clear, and the timing and pace of rate cuts will depend on new data, evolving outlooks, and the balance of risks."

Jeremy Siegel, a professor at the Wharton School, wrote in his weekly commentary for WisdomTree that this indicates Powell and his colleagues are seeking to balance their dual mandate Sigel wrote in his commentary on Monday: "Although Powell commented that part of the reason for the rise in the unemployment rate is the increase in labor supply, he also emphasized that the labor market is clearly softening and does not welcome further softening."

The esteemed finance professor at the University of Pennsylvania supports immediately lowering the benchmark interest rate (currently between 5.25% and 5.5%) to 4% or lower.

Sigel wrote: "In other words, Powell will no longer seek to use the rise in the unemployment rate to achieve the goal of lowering the inflation rate to 2%. This is a very important shift."

While JPMorgan may not agree with Sigel's call for an immediate rate cut, analysts at the largest bank in the United States also noted the shift in Powell's focus on "risk management."

They wrote: "Last week, Powell's speech at Jackson Hole confirmed that the risk balance has shifted, and the Fed does not want to see further slowing in the labor market. We believe this will make the Fed likely to cut rates by about 100 basis points by the end of this year."

Some analysts believe that if the Fed does not cut rates this year, Powell will not only face market turmoil but also risk pushing the economy into a recession.

Thierry Wizman and Gareth Berry, foreign exchange and interest rate strategists at Macquarie, wrote in a report: "We are not saying that an economic recession is imminent," but they added that if rates are not cut, "the likelihood of an economic recession will be greater."