Wall Street knows interest rate cuts are coming. What matters is how big they'll be.

• Federal Reserve Chair Jerome Powell will deliver the keynote speech at Jackson Hole on Friday.
• Markets expect an interest rate cut in September, but it's unclear how big the cut will be.
• Wall Street will be watching closely for any hints from Powell on the rate cut trajectory.

Interest rate cuts are all but certain this fall — and the top Fed official could soon shed light on how quickly Americans will feel the relief.

Wall Street is watching as Federal Reserve Chair Jerome Powell delivers his biggest speech of the year at the annual gathering of central bankers in Jackson Hole, Wyoming, on Friday.

As has been the case with Powell's prior Jackson Hole speeches, he'll likely elaborate on his economic vision and the Fed's approach to addressing inflation, possibly hinting at where the central bank might go next.

This speech comes at a critical time for the Fed, which began hiking interest rates aggressively in 2022 and held them steady for nearly a year in an attempt to slow consumer and business spending and cool off inflation.

Now, however, after unemployment unexpectedly ticked up to 4.3% in July, markets expect the central bank to finally cut rates at its next meeting in September.

CME FedWatch, a tool that estimates interest rate changes based on market probabilities, predicts a 65.5% chance the Fed will cut rates by 25 basis points and a 34.5% the Fed will go even bigger as of Wednesday afternoon, implementing a 50 basis point cut. The larger the cut, the more relief Americans could feel in a shorter timeframe.

Additionally, the Fed's July meeting minutes released on Wednesday confirmed likely cuts: "The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting."

So, the big question isn't whether the Fed will cut rates, but how much. Powell's Friday speech could offer some insight into his approach to rate cuts over the second half of the year.

Things are looking up for the US economy, but it's not 'mission accomplished'

Austan Goolsbee, the president of the Chicago Federal Reserve, told Business Insider that the Fed has been laser-focused on keeping rates high for so long to combat the economy's "overheating" — but things have changed. "This is not what an overheating economy looks like," he said.

The consumer price index, which measures inflation, rose 2.9% over the year in July, marking the first time inflation has fallen below 3% since March 2021. At the same time, unemployment rose, prompting some calls for the Fed to cut rates and give Americans and businesses relief from expensive borrowing costs on credit cards, mortgages, and other kinds of debt.

Powell's guiding principle for the economy has been clear: He will look at the data, and solely the data, to determine the Fed's next steps. While he is always careful not to hint or make promises about what the central bank will do next, markets and economists have closely watched his slight changes in language over the past year to gauge how he feels about the economy.

At the last Federal Open Market Committee meeting in July, Powell said that he "can imagine a scenario in which there would be everywhere from zero cuts to several cuts, depending on the way the economy evolves."

The key question will be whether the incoming economic data demonstrates continued cooling inflation and a "solid labor market," Powell said during the July press conference. "If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

While Powell and other top Fed officials have reiterated over the course of the year that cutting rates too soon would have consequences, such as another uptick in inflation, the latest unemployment data has shifted the rhetoric because the Fed has to adhere to its dual mandate of maximum employment and stable prices.

Minneapolis Fed President Neel Kashkari, for example, told The Wall Street Journal that "the balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have."

Even with rate cuts on the horizon, Goolsbee cautioned against declaring "mission accomplished," noting there's still work to be done on inflation and unemployment.

"We've got to be thinking about where we will need to be to pull off what I call the golden path, which is to get inflation down from these epic heights to something like our target without having a serious recession," Goolsbee said. "And so far, we did that in 2023. This looks like a little bit of that magic dust. It has carried over into 2024, but there's weakening on the labor market side, and so we've got to be attentive."