Instant Reaction: Will the Fed Cut Quicker After This Selloff?

More Wall Street banks are calling for more aggressive cuts 0:00:05.720 --> 0:00:09.280 from the Federal Reserve following last week's jobs report. One 0:00:09.280 --> 0:00:11.039 of the first out of the gate with a call 0:00:11.119 --> 0:00:14.240 for two half point reductions at the next two meetings 0:00:14.720 --> 0:00:17.480 was City Group, joining us now. One of the economists 0:00:17.520 --> 0:00:22.280 behind that call Veronica Clark, us economist at City Veronica, 0:00:22.320 --> 0:00:24.200 Good morning, Thanks so much for being with us. So 0:00:24.320 --> 0:00:27.520 you've had a weekend to think about the impact of 0:00:27.600 --> 0:00:29.600 the jobs report and some of the other data that 0:00:29.600 --> 0:00:32.000 we've seen. Are you sticking to that call? 0:00:32.840 --> 0:00:35.640 Yeah, yeah, good morning, Thanks for having me. Yeah. I mean, 0:00:35.680 --> 0:00:39.120 I think this equity self that we're seeing overnight only 0:00:39.400 --> 0:00:42.160 maybe furthers that call the sense that maybe the Fed 0:00:42.240 --> 0:00:45.040 is a bit behind the curve here. I think if 0:00:45.080 --> 0:00:48.279 the Fed had had this number on Wednesday when they 0:00:48.280 --> 0:00:51.040 were meeting, we might have seen a cut last week already. 0:00:51.479 --> 0:00:53.279 I think, especially the Doves, are just going to be 0:00:53.720 --> 0:00:57.200 increasingly focused on the employment side of that mandate. And 0:00:57.240 --> 0:01:01.240 it's not necessarily the one hundred and fourteen thousand jobs added, 0:01:01.400 --> 0:01:04.360 you know, as a bad number. Four point three percent 0:01:04.400 --> 0:01:08.200 unemployment rate is still generally low, but the trend will 0:01:08.200 --> 0:01:11.400 just be very concerning to Fed officials, and they're far 0:01:11.440 --> 0:01:13.319 from neutral, so yeah, you might as well start with 0:01:13.360 --> 0:01:14.920 some bigger rate cuts right off the bat. 0:01:15.160 --> 0:01:18.520 And to your point, we've heard from the market, to 0:01:18.520 --> 0:01:21.560 some extent pricing in sixty percent odds that the FED 0:01:21.800 --> 0:01:25.080 cuts rates this week, and some of your colleagues at 0:01:25.240 --> 0:01:29.039 JP Morgan Chase are calling for an emergency rate cut 0:01:29.200 --> 0:01:33.400 as well. Do you think that the Fed should cut 0:01:33.480 --> 0:01:35.720 rates before the September meeting? 0:01:36.319 --> 0:01:38.640 Yeah, I mean, that's that's definitely not our base case, 0:01:38.920 --> 0:01:41.000 but yeah, I would never say never in a situation 0:01:41.160 --> 0:01:44.039 like this. In terms of the economic data that would 0:01:44.040 --> 0:01:46.640 get them there, it does seem a bit unlikely. It 0:01:46.680 --> 0:01:49.080 really is going to be employment data that is the 0:01:49.080 --> 0:01:53.960 most important. We won't have another jobs report until early September, 0:01:54.680 --> 0:01:57.200 so that in that sense, there's not necessarily the economic 0:01:57.320 --> 0:01:59.960 data that would get them there, but something like equity 0:02:00.280 --> 0:02:02.400 you know, the decline in equity markets that we've seen 0:02:02.440 --> 0:02:05.920 that that is a big tightening of financial conditions that 0:02:05.960 --> 0:02:07.800 could get them a bit worried that things will be 0:02:07.800 --> 0:02:08.760 slowing even faster. 0:02:09.480 --> 0:02:11.560 Do you think that there's a risk of recession if 0:02:11.600 --> 0:02:15.399 the Fed doesn't cut rates to the levels that you're 0:02:15.440 --> 0:02:15.959 looking for? 0:02:16.680 --> 0:02:19.200 Yeah, to be honest, we actually even have a recession 0:02:19.200 --> 0:02:22.280 in our base case already. You know, these things are 0:02:22.440 --> 0:02:24.840 you know, they start very gradually and then at some 0:02:24.919 --> 0:02:27.920 point you can reach this non linearity and and things 0:02:27.919 --> 0:02:30.760 weaken much faster. It does kind of feel like we're 0:02:31.000 --> 0:02:33.560 on the tipping point of that right now, and it 0:02:33.639 --> 0:02:37.600 might be a bit too late to prevent that slowing altogether. 0:02:38.320 --> 0:02:40.359 So that's actually in our in our base case already. 0:02:40.840 --> 0:02:43.760 Is it just about the jobs market? This weaker than 0:02:43.800 --> 0:02:46.320 expected jobs report from last Friday or what else has 0:02:46.360 --> 0:02:48.280 you thinking that the Fed needs to make up for 0:02:48.360 --> 0:02:48.919 lost ground? 0:02:49.639 --> 0:02:52.079 Yeah, it really is about the labor market. That's where 0:02:52.120 --> 0:02:54.400 we're seeing, you know, most of the weakness. But of 0:02:54.440 --> 0:02:58.240 course that's probably you know, the biggest underlying support to 0:02:58.320 --> 0:03:01.040 the general economy as a whole. And if you see 0:03:01.040 --> 0:03:03.840 the labor market turning, especially if we get to that 0:03:03.840 --> 0:03:06.480 point where you are seeing the bigger layoffs, and that's 0:03:06.520 --> 0:03:09.120 really the last step, that's where it's almost a bit 0:03:09.160 --> 0:03:12.600 too late to prevent the weakening, you would expect to 0:03:12.639 --> 0:03:15.959 see spending pulling back even more, and spending already has 0:03:16.000 --> 0:03:19.120 slowed for a lot of this year. Manufacturing, you know, 0:03:19.200 --> 0:03:21.560 data on manufacturing activity has been a bit weaker, at 0:03:21.639 --> 0:03:25.680 least in the ism the survey indicators. It does seem 0:03:25.680 --> 0:03:28.280 that broadly things are slowing down. 0:03:28.960 --> 0:03:31.680 What if the FED sticks with the messaging that it's 0:03:31.680 --> 0:03:34.239 been putting out there up to now before we got 0:03:34.280 --> 0:03:38.080 this Job's report that twenty five basis point move in 0:03:38.160 --> 0:03:41.440 September is warranted, what would the impact on the economy be. 0:03:42.240 --> 0:03:44.680 Yeah, I mean at this point where we're certainly pricing 0:03:44.880 --> 0:03:46.320 you know that we're going to be getting those bigger 0:03:46.400 --> 0:03:48.760 rate cuts, so you would have to price that out. 0:03:49.600 --> 0:03:53.000 That move higher and yields is a tightening of financial conditions, 0:03:53.000 --> 0:03:56.119 which does seem probably like what the FED doesn't want 0:03:56.240 --> 0:03:59.760 right now if you're tightening conditions into a weakening. You know, 0:04:01.200 --> 0:04:03.920 I don't necessarily think they'll tell us right now that 0:04:04.200 --> 0:04:06.720 you know, yes, it's going to be a bigger fifty 0:04:06.720 --> 0:04:09.320 basis point cut, but we'll see the data over the 0:04:09.360 --> 0:04:11.280 coming weeks. You know, we have Jackson Hole towards the 0:04:11.360 --> 0:04:14.160 end of this month. That might be the avenue to 0:04:14.200 --> 0:04:16.000 signal that, yeah, we're we're going to start a bit 0:04:16.040 --> 0:04:17.120 bigger right off the bat. 0:04:17.279 --> 0:04:19.240 When it comes to the weakness that we saw in 0:04:19.279 --> 0:04:22.120 the jobs report last Friday. Are there seasonal factors that 0:04:22.240 --> 0:04:22.760 play there? 0:04:24.040 --> 0:04:27.720 Not particularly So. There was some speculation that maybe Hurricane 0:04:27.760 --> 0:04:31.159 Barrel that hit during the reference period for this July number, 0:04:31.600 --> 0:04:34.800 maybe that would influence things, Maybe that was causing people 0:04:34.839 --> 0:04:38.080 to miss work or temporary layoffs. But the BLIS actually 0:04:38.120 --> 0:04:41.640 told us that for payrolls there wasn't a big hurricane impact. 0:04:42.600 --> 0:04:45.039 A lot of the weakness we saw really was kind 0:04:45.040 --> 0:04:47.760 of across the board. It was not in sectors that 0:04:47.800 --> 0:04:50.520 you would expect to be impacted by by the hurricane. 0:04:51.200 --> 0:04:53.640 And there are a lot of just you know, fundamental 0:04:53.920 --> 0:04:56.479 ways that you know, employment should be slowing down in 0:04:56.520 --> 0:04:59.680 sectors like construction housing. You know, construction is pulled back, 0:05:00.400 --> 0:05:03.280 Restaurant spending has been pulling back, you know, leisure, hospitality 0:05:03.320 --> 0:05:07.320 employment might be slowing. Yeah, not nothing too idiosyncratic. I 0:05:07.320 --> 0:05:09.800 think this is just genuinely a weakening trend. 0:05:10.320 --> 0:05:13.200 Just thirty seconds left, your colleagues at Goldman Sachs raised 0:05:13.200 --> 0:05:15.840 their recession risk for the US to twenty five percent. 0:05:15.880 --> 0:05:18.040 I know you said recessions in your base case, but 0:05:18.080 --> 0:05:19.240 would you put a number on it? 0:05:20.080 --> 0:05:22.440 Yeah, I mean there, I think there's honestly probably a 0:05:22.480 --> 0:05:25.400 pretty elevated chance that we're in, you know, the start 0:05:25.400 --> 0:05:28.200 of a recession right now. Part of the issue is 0:05:28.240 --> 0:05:31.400 that the official definition of the recession, however, you know 0:05:31.560 --> 0:05:33.960 NBER defines it, We're not going to know that for 0:05:34.360 --> 0:05:37.479 a year, year and a half later. You always define 0:05:37.480 --> 0:05:41.280 the start in retrospect. But these types of you know, moves, 0:05:41.360 --> 0:05:43.400 you know in the unemployment rate, you know, much more 0:05:43.480 --> 0:05:45.440 quickly shooting up in the last couple of months. That 0:05:45.560 --> 0:05:48.240 is what you see at the start of recessions. So 0:05:48.279 --> 0:05:50.280 I would say there's a good chance we're already in 0:05:50.320 --> 0:05:51.600 the early stages of it. 0:05:52.240 --> 0:05:55.120 Okay, thank you for this, Veronica, really great having you 0:05:55.240 --> 0:05:58.839 on these days after your call of Veronica Clark us 0:05:58.880 --> 0:06:00.320 economist at City