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the federal reserve's interest rate cut in september is almost certain, and market attention has shifted to the pace of future adjustments. many decision makers have reached a consensus on taking a step-by-step approach in the final battle against inflation.

at the fed’s annual symposium in jackson hole, wyoming, last week, several policymakers laid out their arguments for a “gradual” or “methodical” rollout of rate cuts, running counter to investor expectations for at least one big rate cut this fall.

fed officials believe that inflation has not yet cooled fully to their 2% target and that the absence of widespread layoffs amid signs of weakness in the labor market means aggressive action is not needed yet.

"methodical, gradual, cautious, these are the words that policymakers often use when turning the ship around," said brett ryan, senior u.s. economist at deutsche bank, who said this is a tentative process and the fed wants to take it slow.

gradualism is a strategy the fed has used in the past during uncertain times, indicating that they want to cut interest rates by 25 basis points at a time. but it is worth noting that fed chairman jerome powell did not join this "chorus" to endorse this argument.

dovish bias

federal reserve chairman jerome powell.

powell, who has staked his claim to fame on keeping inflation down without wreaking havoc on the job market, said nothing in his much-anticipated jackson hole speech about how quickly he expects the fed to act after september. he appears more willing than some of his colleagues to take more aggressive action if the job market deteriorates rapidly.

"we will do everything we can to support a strong labor market while making further progress toward price stability. we do not seek or welcome a further cooling of labor market conditions." powell's statement revealed the fed's vigilance against the risk of potential economic slowdown.

like many other central banks, the fed has taken a gradual approach to most easing and tightening cycles in the modern era, with few exceptions. policymakers quickly cut interest rates to zero during the financial crisis and the pandemic. former fed chairman paul volcker is well known for his steadfast pursuit of a strategy to curb inflation in the late 1970s and early 1980s. but otherwise, monetary policy adjustments have typically been made by just a quarter percentage point at a time.

for now, gradualism will go some way toward easing the level of restrictions currently in place by the fed, but also takes into account that inflation targets have not yet been met. some policymakers remain wary of a resurgence of inflation, given that they underestimated the surge in prices in 2021 and tightened policy too late. officials worry that lower borrowing costs will unleash pent-up demand from consumers and businesses eager for rate cuts.

but at the same time, the labor market is finally starting to normalize, and by some measures it is even slightly weaker. the u.s. unemployment rate unexpectedly rose to 4.3% in july. employers are not laying off workers en masse, but the pace of hiring has slowed significantly.

powell and his colleagues have long argued that a hot job market boosted wages, boosting the spending power of u.s. consumers and fueling inflation, but powell now made clear that effect has worn off.

ey-parthenon economists gregory daco and lydia boussour pointed out that powell seems more dovish than some of his colleagues, that is, he is more inclined to observe economic trends while maintaining loose monetary policy. "however, unless labor conditions deteriorate significantly in the coming weeks, we still expect that most policymakers will prefer a 25 basis point rate cut in september."