This Is What The Rate Cut Cycle Could Look Like

Joe Weisenthal (0:02)

Bloomberg Audio Studios.

Tracy Alloway (0:04)

Podcasts, radio, news.

Joe Weisenthal (0:19)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:24)

Tracy, we're here in Jackson Hole.

Tracy Alloway (0:27)

It's nice to be back.

Joe Weisenthal (0:28)

It's really nice to be back. So this is the second year we've come to the big Kansas City Fed Economic Policy Symposium. And I think it's fair to say, you know, we heard Powell this morning, there's a certain air of like, victory, right?

Tracy Alloway (0:43)

Yeah, the vibe has shifted.

I think last year there was a little bit more, I guess, comfort with the idea of inflation coming down, at least compared to the year before. So remember, two years ago was the famous Powell speech here in Jackson Hole where he stood up and he basically said, there's no way we're going to get inflation down without a degree of economic pain, i.e. a pickup in the unemployment rate, job losses, that sort of thing. And now, fast forward two years, and he basically announced that it's time for rate cuts. And it wasn't a victory lap necessarily, but he sort of walked through how and why he thinks inflation has come down without those job losses.

Joe Weisenthal (1:26)

That's right. And of course, we've seen that tick up in the unemployment rate, not through big layoffs, however. So there's not been a major degree of cuts. But the other aspect of that is like, you know, there was some expectation that to balance the economy, to achieve the inflation mandate, there would have to be some loosening of the labor market. But what he said, and I think it was the second line of the whole speech is, we don't want to see anymore. We're good on, at this point, the risks to the labor market are what we're primarily concerned with, and we do not need to see any more weakness to be confident that inflation is no longer a major risk.

Tracy Alloway (2:01)

Yeah. So the focus has certainly shifted from upside inflation risk to downside labor market risk. But this opens up a whole new set of issues and things that we need to discuss, and I guess everyone's going to be focused on a slightly different set of economic indicators going forward.

Joe Weisenthal (2:21)

Right. So now the question is, if you accept that the primary risk for the Fed, and paula said it, so it is, is now protecting against further weakness in the labor market, what does that look like? because yes, we know now basically for certain that a rate cut is coming in September, but there are still all types of questions about the size of the cut, how many cuts, the sequencing, etc. From a market perspective in particular, I would say this is actually still a very live and open question.

Tracy Alloway (2:48)

No, absolutely. The other thing that's happening, and we should get into this, but the Fed has said so many times that it's data-dependent now. If you say you're data-dependent and you're really focused on what's going on in the labor market, then that's a combination for everyone to be watching that next jobs report as an indicator of whether or not we get 25 or 50 bips, or if it comes in better than expected, maybe you don't get a rate cut at all. I don't know.

Joe Weisenthal (3:14)

I guess nothing is locked in stone.

Tracy Alloway (3:16)

Everything is possible.

Joe Weisenthal (3:17)

Anyway, I'm very excited. We have the perfect guest today, someone that we have had on Odd Lots several years ago, talking about similar stuff, including, I think it was the discussion about how you even ascertain the neutral rate of interest.

But we are going to be talking about the question of what will this rate cut cycle look like that we're all expecting. We are speaking with Peter Williams. He is the Managing Director of Macro Research and Central Bank Policy at 22V Research. Previously, he had been at the IMF. He was at Evercore. He lives in Bozeman, Montana. He just drove down here to meet with us, do some fly fishing here in Jackson Hole and also meet with us. He was not in the room, but Tracy and I weren't in the room either. So we're all reading this speech. So, Peter, thank you so much for coming on Odd Lots. It's nice to meet you here. It's nice to see you here.

Peter Williams (4:06)

Nice to meet you guys. Nice to be down.

Joe Weisenthal (4:07)

We never met in person, right? Before it was...