Two years ago, Jerome H. Powell took the podium at the Federal Reserve Bank of Kansas City’s annual conference at Jackson Hole in Wyoming and warned America that lowering inflation would require some pain.
On Friday, Mr. Powell, the Federal Reserve chair, will again deliver his most important policy speech of the year from that closely watched stage. But this time, he is much more likely to focus on how the Fed is trying to pull off what many onlookers once thought was unlikely, and maybe even impossible: a relatively painless soft landing.
Both the Fed and the American economy are approaching a crossroads. Inflation has come down sharply since its 2022 peak of 9.1 percent, with the year-over-year increase in the Consumer Price Index falling to 2.9 percent in July. Given the progress, the critical question facing Fed officials is no longer how much economic damage it will take to wrestle price increases back under control. It is whether they can finish the job without inflicting much damage at all.
That remains a big if.
Consumer spending and overall economic growth have held up in the face of high interest rates, which are meant to cool demand and eventually weigh down inflation. But the job market is beginning to weaken. Revisions released this week showed that employers hired fewer workers in 2023 and early 2024 than was previously reported. The unemployment rate rose to 4.3 percent in July, up from 4.1 percent in June and 3.5 percent a year earlier. The latest jump could be a fluke — a hurricane messed with the data — but it could also be an early warning that the economy is hurtling toward the brink of a recession.
That makes this a critical moment for the Fed. Officials have held interest rates at a two-decade high of 5.3 percent for a full year. Now, as they try to secure a soft and gentle economic landing, they are preparing to take their foot off the brake. Policymakers are widely expected to begin lowering rates at their meeting in September.
Mr. Powell could use his speech to confirm that a rate cut is imminent. But most economists think that he will avoid detailing just how much and how quickly rates are likely to drop. Fed officials will receive a fresh jobs report on Sept. 6, providing a clearer idea of how the economy is shaping up before their Sept. 17-18 meeting.
Instead, Mr. Powell’s speech could underscore just how much two years have changed things. In 2022, he pledged to do what it took to lower rapid inflation. This time, he could make it clear that the Fed’s focus is now much more balanced. Central bankers want to keep inflation cooling, but with today’s price increases at much more benign levels, they are eager to avoid pummeling the labor market and economy in the process.
“This is his narrative-setting speech,” said Julia Coronado, founder of MacroPolicy Perspectives. “The overall narrative is: We are going to do whatever it takes to keep this soft landing going.”
The logic behind high interest rates is fairly simple: When it costs more to borrow money to buy a car or a house, fewer people take on debt to make those purchases. Business expansions also slow. And as that effect trickles through the economy, it becomes more difficult for companies to raise prices without losing customers.
When the Fed lowers interest rates, as it is preparing to do, it takes that pressure off and can allow the economy to speed back up.
That entails risks. If inflation is not fully under control, lowering rates too much too soon could fuel demand, enable companies to raise prices and allow inflation to get stuck at a relatively rapid pace.
In fact, there’s a precedent for that. In the 1970s, Fed officials responded to higher unemployment by lowering borrowing costs before they had fully crushed a burst of inflation — what is now seen as a major policy mistake. The shift in stance laid the groundwork for a second spike of rapid inflation that proved even more painful to stamp out.
Policymakers have spent months fretting over the possibility of backing off too early. That is why they did not cut interest rates in July: They wanted more confidence that inflation was truly vanquished.
Yet lowering interest rates too slowly or too late is also a gamble.
Waiting too long might harm the labor market. And once the job market starts to deteriorate, its weakness tends to feed on itself: As people lose or fail to find jobs, they are likely to cut back on their spending. As consumers turn cautious, companies hire less.
In fact, big jumps in joblessness almost never happen outside of recessions, which is why the recent pop in the unemployment rate is ringing alarm bells.
“The risk is tilting toward employment,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “If they put on their blinders in the name of moving prudently, that would include the risk of a bumpier landing than necessary.”
Economists widely agree that the size of the September rate cut will hinge on what happens in the Sept. 6 jobs data — along with what comes after. The Fed meets again in November and then December. If the employment report is another bad one, Fed officials will have real reason to fear that the economy is on the verge of cracking, and they may react swiftly by making bigger cuts, economists think.
But if July was a false alarm and the labor market looks OK, central bankers may still be cautious in declaring that they have nailed the landing — even if it is looking good, with inflation cooling and the economy holding up.
Celebrating is probably something for another Jackson Hole, one far in the future. William English, who was formerly director of the division of monetary affairs at the Fed, was at the central bank when it achieved a rare soft landing in 1995.
“It never felt assured, at least to me, at the time,” he said. “I’m not sure there will ever come a moment when the Fed will say: We stuck the landing. That’s something historians will sort out 10 years from now.”