The past week’s data deluge left behind a few distinct impressions: Inflation is on the run, the labor market appears to be OK if no longer on fire, and the economy is not headed off a cliff despite the ever-lingering potential for a substantial slowdown. That’s the backdrop for a markedly critical period ahead for Federal Reserve policymakers. It starts in the week ahead with the central bank’s annual conclave in Jackson Hole, Wyoming, continues in the first week of September with a seemingly make-or-break jobs report, then winds through more vital economic data concluding with the Fed’s Sept. 17-18 policy meeting. First up: Chair Jerome Powell’s policy speech next Friday to wrap up the Jackson Hole event, during which he is expected at least to sketch — in pencil, not pen — the likely course ahead, with plenty of flexibility so the Fed doesn’t get fooled again, as it did in the early days of the inflation surge. “He still wants to give himself a little bit of room. We have to remember, the Fed made one mistake, the transitory” call on inflation, said Quincy Krosby, chief global strategist at LPL Financial. “That mistake is in the history books. They were late to what they were supposed to be doing. They don’t want to make a mistake on this side of equation.” Specifically, the Fed is faced with how quickly and aggressively it should respond now that the inflation rate is waning . Here’s what we learned from the last rapid round of data: Consumer price increases have slowed to their weakest pace in more than three years, wholesale prices barely increased in July, spending has proved much more resilient than expected and layoffs, after a brief spike a few weeks ago, are near their long-term trend. To be sure, not all the news was good: Housing remains a weak spot for the economy and appears to be getting worse as judged by constriction starts and permits hitting a four-year low in July. Wages are increasing, but just 0.7% faster than inflation . And if you’re looking for inflation, it showed up in imports , where the annual pace of price increases hit its highest level since December 2022, albeit at just 1.6%. Ready to ease Still, on balance markets largely feel the Fed can — and should — start lowering interest rates next month. “This is not an exact science. It’s probably as much an art form as it is a science,” Krosby said. “The longer they wait, the more they are going to have problems. There will be different problems, but they’re going to have problems.” Market pricing Friday afternoon pointed to about 3-to-1 odds of a quarter percentage point, or 25 basis- point, reduction in September, according to the CME Group’s FedWatch gauge of fed funds futures contracts. From there, traders see another similar move in November and December, with the final cut this year possibly being half a point. The biggest concern now is that the Fed lowers because it wants to guide the economy in for the vaunted soft landing, rather than having to move dramatically because it is forced to, i.e. should the labor market crater or some other crisis come up. “The market wants it to be commensurate with inflation coming down, not with an emergency rate cut,” Krosby said. “The primal fear for the market is that we have a recession, and not a shallow recession but a deep recession that changes the equation completely.” Former Fed Vice Chair Richard Clarida, a self-described “charter member of team transitory” while he served, said he thinks the most likely path now is a quarter-point cut in September. However, he also predicted that the August nonfarm payrolls report, to be delivered in early September, would have an outsized impact, despite Powell emphasizing that the Fed is “data dependent” and not “data point dependent.” “Jay Powell says they don’t want to be data point dependent, and I think that makes sense. But I would emphasize that I do think that there is special importance in what we hear about the labor market,” Clarida said during a CNBC interview Friday. “If it’s a disastrous report, negative payrolls and a big rise in employment, then we’ll go 50. So I do think it’s data dependent for that first move.” The case not to cut To be sure, not all market participants are on board with a reduction. Even with a growing emphasis on the jobs picture, Powell and the other Fed officials are still unlikely to declare total victory over inflation, and with good reason, said Komal Sri-Kumar, head of Sri-Kumar Global Strategies. While the aggregate inflation numbers are moving lower, housing-related costs continue to defy expectations that they will trend down, and the strong 1% gain in retail spending in July suggests consumers are withstanding high interest rates, in itself an inflationary trend. “You [cut] because inflation is below target … The second reason you should be cutting is because the economy is weak,” Sri-Kumar said. “Where is the weakness? I don’t think you have signs of weakness in the economy. You don’t have signs of inflation being controlled, and you don’t have any signal for the Fed to switch focus.” However, Sri-Kumar said he expects the Fed to cut anyway, and for Powell to deliver a strong signal at Jackson Hole that easier policy is on the way. “He’s probably essentially going to give his indication, not only of that, but also pat himself on the back for success on inflation coming down significantly,” he said. “So the big market rally does not have to wait until September 18. It has already begun, and he may give it one more piece of stimulus when he speaks in Jackson Hole.”