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(Bloomberg) -- The Federal Reserve is set to begin unwinding its tightening campaign this month as inflation cools and the labor market slows. The big question policymakers now face is whether a small interest-rate cut will be enough to keep the economy in expansion mode.

The monthly jobs report Friday showed the pace of hiring in the US moderated over the last three months to the slowest since the onset of the pandemic in 2020. Even so, the numbers left investors skeptical as to whether Fed officials would opt for an outsize rate cut at their Sept. 17-18 meeting.

The release sets the table for a heated debate between those like Fed Chair Jerome Powell, who is open to a larger cut to ensure the central bank doesn’t fall behind the curve, and other officials who “are still waffling on a quarter point,” according to Diane Swonk, chief economist at KPMG.

The stakes are high. Under Powell, the Fed made the mistake of moving too late to quash the worst bout of inflation since the early 1980s, undermining the buying power of American households. If they are too slow this time, they might drive up unemployment and tip the economy into recession.

“Powell has got to be thinking about his legacy right now, and he’s really got to nail this soft landing,” Swonk said.

The choice facing Fed officials — whether to start easing gradually or to front-load rate cuts — is bound to be contentious, as is often the case during major turning points for monetary policy.

With most measures of economic activity now firmly trending down, some economists see more risk in taking a cautious approach than in moving aggressively. Rising joblessness can quickly become self-perpetuating as consumers rein in spending, in turn causing more companies to let workers go. Already, the unemployment rate has risen almost a full percentage point from last year’s low, triggering a popular recession indicator known as the “Sahm rule.”

“It raises some serious questions, not just about this meeting, but over the next several months,” Chicago Fed President Austan Goolsbee said Friday on CNBC. “How do we make an effort to not have things turn into something worse.”

A separate Bureau of Labor Statistics report published on Sept. 4 showed job openings fell in July to the lowest level since the start of 2021. The ratio of openings to unemployed Americans — which shot as high as two to one at the height of pandemic-era labor shortages — has now returned to about one to one.

Markets Whipsawed

Both releases followed comments from Powell on Aug. 23, who told a conference in Jackson Hole, Wyoming that he and his colleagues “do not seek or welcome further cooling in labor market conditions.”

“Powell is trying to pull the Fed in a dovish direction,” said Tim Duy, chief US economist at SGH Macro Advisors. “If the economy were to unexpectedly slow, your rates are too high to adjust to that, to soften that blow.”

Financial markets were whipsawed Friday after the jobs report initially led investors to boost bets for a half-point cut. Those bets were pared back hours later when Fed Governor Christopher Waller suggested a half-point cut is unlikely before the release of more figures in the coming months.

The government will publish two more monthly jobs reports between the Fed’s September policy meeting and policymakers’ next gathering on Nov. 6-7. Investors are currently putting better-than-even odds on half-point cuts at the November and December meetings.

“The Fed tends to be gradual,” said Stephen Juneau, an economist at Bank of America. “They don’t want to send the wrong signal to the markets if activity is still holding up, and broadly speaking, the US economy still appears to be doing fine.”

A quarter-point cut this month and two half-point cuts in November and December would leave the target range for the central bank’s benchmark at 4% to 4.25% — a level still well above what most Fed officials deem “neutral,” keeping pressure on economic activity.

Inflation Risk

Some Fed officials have signaled in recent weeks they’re still concerned about upside risks to inflation if the central bank cuts rates too quickly and provides a jolt to economic activity. The Fed’s preferred measure of inflation, at 2.5%, remains a bit above their 2% target.

Those policymakers can also point to the trend in layoffs, which have remained low despite the slowdown in hiring.

“History shouts to us that loosening monetary policy prematurely is a dangerous gambit that can rekindle inflation and entrench it in the economy for many months or even years,” Atlanta Fed President Raphael Bostic said in an essay published on Sept. 4.

For Powell, the slowdown in the labor market risks upending what has, until now, been a remarkable feat for the Fed. In 2022 and 2023, it embarked on the most aggressive tightening cycle in four decades in a bid to curb inflation. Bringing it back to earth without causing a recession would be a rare achievement.

And pulling that off may depend on the next few rate decisions.

“You should be going now when the increase in unemployment is somewhat more benign than waiting for it to become so obvious that you’re already too late,” said Neil Dutta, head of economics at Renaissance Macro Research.