The U.S. Federal Reserve's impending rate cuts have investors questioning the potential impact on the economy. The primary concern is whether the Fed can achieve a smooth economic transition without stalling growth or reigniting inflation.

What Happened: Investors are evaluating the Federal Reserve's capacity to execute a "soft landing" for the economy, Reuters reported Thursday. The strategy involves reducing inflation without significantly affecting growth, a tactic that has enhanced asset prices this year.

On Wednesday, Fed Chairman Jerome Powell hinted that the central bank might cut rates in September if inflation continues to cool. The Fed had chosen to hold the interest rate steady at 5.25-5.5% for the eighth consecutive meeting in July. This is the strongest indication yet that officials are gearing up to ease monetary policy soon.

However, this signal has not entirely placated investors. Some argue that the Fed has kept rates high for too long, potentially endangering the chances of a successful economic soft landing. Others fear that loosening monetary policy amid a relatively strong economy could spark inflation, limiting the Fed's ability to further cut rates.

"There are reasons to think the soft landing is still alive ... but the risks are two-sided," said George Catrambone, head of fixed income and trading at DWS.

"Soft landings don't materialize by waiting too long."

Some investors are also concerned about rate cuts taking longer to keep the growth momentum, thus increasing the chance of a recession.

Jack McIntyre, of Brandywine Global Investment Management said, "Even if the Fed starts in September, it might not be enough to alter the course of the economy going into 2025."

As of Wednesday, futures tied to the Fed's policy rate showed investors pricing in an 87% chance of a September 25 basis-point cut. Despite this, U.S. stocks maintained sharp gains, with the S&P 500 closing up 1.6%.

Investors are now eagerly awaiting Friday's employment data report and the Fed's Jackson Hole symposium later this month for further insights into the economy's trajectory.

Why It Matters: There is also an increasing likelihood of more fed rate cuts in the first half of 2025, according to market economists.

"Encouraging inflation news and a further rise in the unemployment rate have pushed Fed officials closer to cutting," Goldman Sachs economist David Mericle said in a recent note. Mericle said the July CPI report would be enough to lead to a September rate cut.  

After the Federal Reserve decided at its Wednesday meeting to keep the key interest rate between 5.25% and 5.5%, Bill Adams, chief economist for Comerica Bank, said the committee held rates steady and made a "dovish change" to its July statement to indicate that the time for rate cuts is near.