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

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<v Speaker 1>More Wall Street banks are calling for more aggressive cuts

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<v Speaker 1>from the Federal Reserve following last week's jobs report. One

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<v Speaker 1>of the first out of the gate with a call

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<v Speaker 1>for two half point reductions at the next two meetings

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<v Speaker 1>was City Group, joining us now. One of the economists

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<v Speaker 1>behind that call Veronica Clark, us economist at City Veronica,

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<v Speaker 1>Good morning, Thanks so much for being with us. So

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<v Speaker 1>you've had a weekend to think about the impact of

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<v Speaker 1>the jobs report and some of the other data that

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<v Speaker 1>we've seen. Are you sticking to that call?

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<v Speaker 2>Yeah, yeah, good morning, Thanks for having me. Yeah. I mean,

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<v Speaker 2>I think this equity self that we're seeing overnight only

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<v Speaker 2>maybe furthers that call the sense that maybe the Fed

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<v Speaker 2>is a bit behind the curve here. I think if

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<v Speaker 2>the Fed had had this number on Wednesday when they

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<v Speaker 2>were meeting, we might have seen a cut last week already.

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<v Speaker 2>I think, especially the Doves, are just going to be

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<v Speaker 2>increasingly focused on the employment side of that mandate. And

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<v Speaker 2>it's not necessarily the one hundred and fourteen thousand jobs added,

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<v Speaker 2>you know, as a bad number. Four point three percent

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<v Speaker 2>unemployment rate is still generally low, but the trend will

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<v Speaker 2>just be very concerning to Fed officials, and they're far

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<v Speaker 2>from neutral, so yeah, you might as well start with

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<v Speaker 2>some bigger rate cuts right off the bat.

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<v Speaker 1>And to your point, we've heard from the market, to

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<v Speaker 1>some extent pricing in sixty percent odds that the FED

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<v Speaker 1>cuts rates this week, and some of your colleagues at

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<v Speaker 1>JP Morgan Chase are calling for an emergency rate cut

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<v Speaker 1>as well. Do you think that the Fed should cut

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<v Speaker 1>rates before the September meeting?

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<v Speaker 2>Yeah, I mean, that's that's definitely not our base case,

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<v Speaker 2>but yeah, I would never say never in a situation

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<v Speaker 2>like this. In terms of the economic data that would

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<v Speaker 2>get them there, it does seem a bit unlikely. It

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<v Speaker 2>really is going to be employment data that is the

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<v Speaker 2>most important. We won't have another jobs report until early September,

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<v Speaker 2>so that in that sense, there's not necessarily the economic

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<v Speaker 2>data that would get them there, but something like equity

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<v Speaker 2>you know, the decline in equity markets that we've seen

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<v Speaker 2>that that is a big tightening of financial conditions that

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<v Speaker 2>could get them a bit worried that things will be

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<v Speaker 2>slowing even faster.

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<v Speaker 1>Do you think that there's a risk of recession if

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<v Speaker 1>the Fed doesn't cut rates to the levels that you're

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<v Speaker 1>looking for?

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<v Speaker 2>Yeah, to be honest, we actually even have a recession

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<v Speaker 2>in our base case already. You know, these things are

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<v Speaker 2>you know, they start very gradually and then at some

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<v Speaker 2>point you can reach this non linearity and and things

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<v Speaker 2>weaken much faster. It does kind of feel like we're

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<v Speaker 2>on the tipping point of that right now, and it

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<v Speaker 2>might be a bit too late to prevent that slowing altogether.

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<v Speaker 2>So that's actually in our in our base case already.

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<v Speaker 1>Is it just about the jobs market? This weaker than

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<v Speaker 1>expected jobs report from last Friday or what else has

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<v Speaker 1>you thinking that the Fed needs to make up for

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<v Speaker 1>lost ground?

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<v Speaker 2>Yeah, it really is about the labor market. That's where

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<v Speaker 2>we're seeing, you know, most of the weakness. But of

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<v Speaker 2>course that's probably you know, the biggest underlying support to

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<v Speaker 2>the general economy as a whole. And if you see

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<v Speaker 2>the labor market turning, especially if we get to that

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<v Speaker 2>point where you are seeing the bigger layoffs, and that's

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<v Speaker 2>really the last step, that's where it's almost a bit

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<v Speaker 2>too late to prevent the weakening, you would expect to

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<v Speaker 2>see spending pulling back even more, and spending already has

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<v Speaker 2>slowed for a lot of this year. Manufacturing, you know,

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<v Speaker 2>data on manufacturing activity has been a bit weaker, at

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<v Speaker 2>least in the ism the survey indicators. It does seem

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<v Speaker 2>that broadly things are slowing down.

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<v Speaker 1>What if the FED sticks with the messaging that it's

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<v Speaker 1>been putting out there up to now before we got

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<v Speaker 1>this Job's report that twenty five basis point move in

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<v Speaker 1>September is warranted, what would the impact on the economy be.

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<v Speaker 2>Yeah, I mean at this point where we're certainly pricing

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<v Speaker 2>you know that we're going to be getting those bigger

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<v Speaker 2>rate cuts, so you would have to price that out.

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<v Speaker 2>That move higher and yields is a tightening of financial conditions,

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<v Speaker 2>which does seem probably like what the FED doesn't want

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<v Speaker 2>right now if you're tightening conditions into a weakening. You know,

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<v Speaker 2>I don't necessarily think they'll tell us right now that

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<v Speaker 2>you know, yes, it's going to be a bigger fifty

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<v Speaker 2>basis point cut, but we'll see the data over the

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<v Speaker 2>coming weeks. You know, we have Jackson Hole towards the

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<v Speaker 2>end of this month. That might be the avenue to

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<v Speaker 2>signal that, yeah, we're we're going to start a bit

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<v Speaker 2>bigger right off the bat.

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<v Speaker 1>When it comes to the weakness that we saw in

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<v Speaker 1>the jobs report last Friday. Are there seasonal factors that

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<v Speaker 1>play there?

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<v Speaker 2>Not particularly So. There was some speculation that maybe Hurricane

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<v Speaker 2>Barrel that hit during the reference period for this July number,

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<v Speaker 2>maybe that would influence things, Maybe that was causing people

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<v Speaker 2>to miss work or temporary layoffs. But the BLIS actually

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<v Speaker 2>told us that for payrolls there wasn't a big hurricane impact.

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<v Speaker 2>A lot of the weakness we saw really was kind

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<v Speaker 2>of across the board. It was not in sectors that

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<v Speaker 2>you would expect to be impacted by by the hurricane.

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<v Speaker 2>And there are a lot of just you know, fundamental

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<v Speaker 2>ways that you know, employment should be slowing down in

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<v Speaker 2>sectors like construction housing. You know, construction is pulled back,

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<v Speaker 2>Restaurant spending has been pulling back, you know, leisure, hospitality

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<v Speaker 2>employment might be slowing. Yeah, not nothing too idiosyncratic. I

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<v Speaker 2>think this is just genuinely a weakening trend.

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<v Speaker 1>Just thirty seconds left, your colleagues at Goldman Sachs raised

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<v Speaker 1>their recession risk for the US to twenty five percent.

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<v Speaker 1>I know you said recessions in your base case, but

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<v Speaker 1>would you put a number on it?

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<v Speaker 2>Yeah, I mean there, I think there's honestly probably a

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<v Speaker 2>pretty elevated chance that we're in, you know, the start

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<v Speaker 2>of a recession right now. Part of the issue is

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<v Speaker 2>that the official definition of the recession, however, you know

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<v Speaker 2>NBER defines it, We're not going to know that for

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<v Speaker 2>a year, year and a half later. You always define

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<v Speaker 2>the start in retrospect. But these types of you know, moves,

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<v Speaker 2>you know in the unemployment rate, you know, much more

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<v Speaker 2>quickly shooting up in the last couple of months. That

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<v Speaker 2>is what you see at the start of recessions. So

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<v Speaker 2>I would say there's a good chance we're already in

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<v Speaker 2>the early stages of it.

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<v Speaker 1>Okay, thank you for this, Veronica, really great having you

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<v Speaker 1>on these days after your call of Veronica Clark us

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<v Speaker 1>economist at City