Key Takeaways

• Encouraging inflation data this week has removed doubts among economists and market participants about whether the Federal Reserve will cut interest rates, but there's a debate going on about how swift and deep those cuts will be.

• Some Fed watchers argue that if the central bank doesn’t make a big cut at its September policy meeting, it could result in a damaging economic slowdown.

• Fed Chair Jerome Powell has said the central bank could cut the benchmark rate as soon as September, but officials haven't indicated that it's a certainty. Upcoming comments from Powell and others could provide insight into the path ahead.

Inflation data released Wednesday provided the latest indication to economists and investors that the Federal Reserve will be in a position start cutting interest rates next month.

The debate among Fed watchers has moved on from whether rates will be cut to how soon and deep the cuts will be. With inflation apparently under control, attention has turned to the possibility that a failure to cut rates aggressively could pose serious damage to the economy, especially given recent data showing a weakening in the labor market.

“In a not-so-subtle shift, the market has moved from worrying about inflation to worrying about economic growth,” wrote Chris Zaccarelli, Independent Advisor Alliance chief investment officer. “The biggest change in the Fed’s plans has to be the cadence of cuts.”

Fed officials, who have a dual mandate to promote price stability and maximum employment, have also expressed concerns about deteriorating labor market conditions as inflation has moderated. They haven't, however, committed to cutting rates.

Fed Awaiting More Data

Fed Chair Jerome Powell and his colleagues have said rate cuts are possible as soon as the next meeting of the Federal Open Market Committee in mid-September, but that it all depends on how data looks until then.

In an effort to bring inflation closer to the Fed's 2% annual target, the committee has held the influential federal funds rate at a range of 5.25%-5.5% for more than a year, pushing up the costs of car loans, mortgages and other types of borrowing. The July consumer price report released Wednesday showed annual inflation falling below 3% for the first time in three years.

KPMG Chief Economist Diane Swonk said cooler inflation and a shift in the labor market “reinforces the argument for a half percent cut in September to ensure we avoid a full-blown recession.”

Not all Fed watchers agree that such a deep cut is required immediately.