Powell argued this week that the Fed did not "lag behind" at the start of the rate-cutting cycle.

His main challenge in the coming months is to maintain the coherence of this narrative if the labor market continues to cool and the economy worsens.

Powell said at a press conference: "We do not think we lagged, we think it's timely, but you can see it as a sign of our commitment not to lag behind."

Some people on Wall Street still have doubts that this week's large 50-basis-point rate cut by the Fed is an attempt to catch up to the curve, and that the future path of rate cuts may be too shallow.

Gregory Daco, Chief Economist at Ernst & Young, said the Fed is cutting rates in a "reactive" rather than proactive manner.

He pointed out, "Powell acknowledged that if the Fed had seen the employment data for July first, it may have cut rates in July." Data released two days after the July meeting showed an increase in the unemployment rate to 4.3%, causing concerns about the Fed waiting too long to take action.

Although the unemployment rate dropped to 4.2% in August, the same concerns may resurface if it rises again in the coming months.

Dako said, "Federal Reserve policymakers must adopt a strong forward-looking framework and abandon the practice of relying on data. Unfortunately, they have not done so yet."

Federal Reserve officials predicted this week that the US unemployment rate will rise to 4.4% this year and remain at this level next year.

Another challenge facing Powell is that Wall Street expects more interest rate cuts in the future than Federal Reserve policymakers forecast. This week, policymakers estimated that there will be two more rate cuts by the end of 2024, each 25 basis points, and four more in 2025.

Michael Feroli, Chief Economist at JPMorgan, said he still expects the pace of rate cuts to be faster than the Federal Reserve consensus.

Feroli expects that if the next two employment reports are further weak, there will be a 50 basis point rate cut at the next meeting in early November.

Luke Tilley, Chief Economist at Wilmington Trust, said the Fed's predicted rate cut path is too slow for an economy with normalized employment and inflation expected to reach the Fed's 2% target in the first quarter of 2025. Therefore, Tilley expects a 200 basis point rate cut next year (twice as much as the Fed's forecast) and rates to fall to a neutral level that neither stimulates nor restrains growth by next autumn.

He said, "More importantly is the long-term path, and at this point, the Fed is still slightly behind, as the median forecast is only to lower rates by 100 basis points next year."

Powell will also have to deal with signs of internal divisions over the rate cut path.

The Federal Reserve's rate-setting committee is almost evenly divided on the expected number of additional interest rate cuts this year. Seven policymakers support a 25-basis-point rate cut before the end of the year, while nine members support an additional 50-basis-point cut. Two policymakers do not expect any further cuts.

This path means that although several officials may support a 25-basis-point rate cut this month, they choose to cut rates by 50 basis points in order to avoid further deterioration in the labor market.

Federal Reserve Board Director Bowman even voted against a 50 basis point rate cut and instead supported a smaller 25 basis point rate cut. This is the first time that the Federal Reserve has seen a dissenting vote since 2005.

Dako said, 'Federal Reserve Chairman (Powell) is now considered to be influential because he successfully convinced most officials that an early rate cut is the best option, but the cost is that decision-makers may resist rapid rate cuts in the next two policy meetings.'The Federal Open Market Committee (FOMC)It is considered to be highly influential because he successfully persuaded most officials that an early rate cut is best, but the cost is that decision-makers may resist rapid rate cuts in the next two policy meetings.

Editor/Lambor