Central bank rate cuts: Ask why instead of when and to what extent

livemint.com:

The focus of market players and borrowers has turned towards monetary policy in the US, particularly the two questions of when and by how much will its central bank, the Federal Reserve, cut the US Fed funds rate. Anticipation of imminent cuts rose after the Jackson Hole huddle of central bankers and economists, an occasion that market participants across the world were watching for cues.

“The time has come for policy to adjust," Fed chair Jerome Powell said in his speech, adding that “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks." Futures markets are now pricing in a 100% chance of at least a quarter percentage point (25 basis points, i.e.) rate cut by the US Fed in September, and have raised the odds of a potential 50-basis-points cut to about one-in-three. However, it is more important for borrowers and markets to focus on the question of ‘why,’ rather than ‘how much’ and ‘when.’ A clearer understanding of the underlying reasons can help understand the evolution of the America rate cycle better.

So, why would a central bank or the Fed cut rates? The first question to ask is: Is the central bank confident of having won the battle against inflation? Powell expressed confidence that there was “good reason" to believe US inflation could fall further without damaging the economy and that the Federal Reserve can still sustainably meet its 2% goal. That would warrant a shift to neutral-rate territory, which was estimated at 2.55%.