Our next guest says the Fed should pause or should
cut rates next week.
Ian Shepherdson joins us now.
He's chief economist at Pantheon
Macroeconomics. And we were just talking
off camera trying to understand the.
I think Ken Griffin and Jamie Dimon have similar
reasons for thinking that you should wait.
And I think that is that inflation can be resurgent.
And if you start and then have to
to again raised later, that increases a hard landing and
the possibility of a hard landing because if Jamie Dimon
is worried about a hard landing,
he should want to cut rates now.
But he's not. I think he's worried about it getting
out of control where you have to go much higher
than you thought and then you have to you think
a soft landing is happening,
but you think they should cut rates right away.
Why? Yeah, because I think that inflation is actually going
to perform much better than most people and the Fed
think over the course of the rest of this year.
You know, this idea that that it could rebound is
kind of rooted in what happened in the 70s where
it did rebound,
but there was an awful lot of things that are
very different then compared to now and all of the
things that I wanted to see to to kind of
renormalize after the pandemic so I could be confident that
inflation would come down and stay down.
They've all happened. You know,
the labor market has normalized rapidly.
Supply chain chaos is a thing of the past,
no threat from global food and energy prices like we
had a couple of years ago.
And the housing market's normalizing as well.
And these things haven't fully worked through into the inflation
numbers yet,
but I think they will.
So you know, fearing that there's something bad just around
the corner.
Well, you need to tell me what that thing is
and I'm just not seeing it.
Even the tight labor market is.
Isn't what what that used to be what everyone said,
yeah, it's the wages, NASA,
I would tell you that it looks like the markets
are anticipating cuts near term.
Global stock markets all hitting highs.
U.S. stock market hitting highs.
Gold hitting highs. Bitcoin hitting highs.
These are all
Fed cuttings reopening the spigot,
turning the the liquidity back on.
These are all signs of that.
So the market is going to be disappointed if if
we really don't,
if the market will be disappointed,
they don't go for sure.
I think the market's saying they're they're expecting the Fed
and I you know I think they're right.
I the the the case for doing nothing this year
which I keep hearing whispers that they're going to do
nothing this year is going to sit there for the
whole year. I'm really struggling with that.
But it does depend on the,
the inflation picture continuing to be
a cooler number today too,
cooler than consensus. Yeah, I know the PPI has been
performing great.
It's very noisy, but the trend has been really strongly
downwards.
You know, the CPI yesterday was a bit disappointing,
but it certainly wasn't terrible.
And all the leading indicators are telling you that things
should improve substantially further over the course of the next
six months or so.
And at the same time,
I got to say I'm getting a bit nervous about
the spring and summer labor market,
which would be a real game changer for the Fed
and for the markets because you know,
we're seeing hiring indicators softening and we're seeing firing indicators
rising And that's a combination we haven't had in this
cycle.
And I'm, I'm really uncomfortable with it.
Is everyone seeing that because not everyone talks about that.
Well the the cracks in the labour market,
we did see the the employment unemployment rate,
the the unemployment rate tick up
a little bit, but that has to do with participation.
Yeah, that, that, that was noise.
What I'm worried about is small businesses,
you know, the NFIB survey that doesn't get as much
attention as it should.
It has a pretty reliable hiring indicator.
It's dropped hard in the last three months and at
the same time,
you know the Challenger layoff notifications have gone up.
Google searches for claiming benefits have gone up.
Let me just stop you there.
If we should be paying more attention to the Anna,
might be. Yesterday they said their tough concern was inflation.
All of these. Well, that's that's what they said.
But that's not what comes out of their numbers.
What comes out of their numbers is businesses worrying about
credit conditions,
cutting their capital spending plans and cutting their hiring plans.
And the commentary in that survey sometimes is quite different
to what the numbers actually show.
Also said that they had to pay a lot more
to hire new workers and that that's where they expect
the inflationary pressures to continue.
Yeah, I just don't see that in their numbers.
I saw it read in the commentary and then look
at the numbers and I see,
you know, jobs hard to fill is falling,
hiring intentions are falling, credit conditions are tight,
CapEx is falling actually that their selling price number is
falling as well.
So yeah, I'm struggling to reconcile what they said with
what the numbers actually show.
But the numbers, the hiring index,
which is the one that keeps me awake at night,
that's dropped hard in the last three months.
Now that could be noise,
but three months to me is looking more like a
trend.
Four or five months for sure is a trend.
So I'm getting twitchy about this because it's happening at
the same time that these layoff announcement numbers are creeping
high core up two months in a row hotter than
anticipated. Yeah, yeah, it did.
Three months would be a trend there.
Three months would be interesting.
I'd be surprised if you get 3 months.
We've had two months of weird rent numbers
kind of pop in airline first you
know actually twitch. You feel twitchy.
You don't actually start twitchy.
I always feel twitchy, John.
You feel twitchy. Feel twitchy.
Could we could we see it if it if it
happened here because I'm going to keep get you to
keep talking about this.
So are we restrictive? So we're restrictive right now.
What do you think the,
the actual, the, the gauge that the Fed uses its
favorite,
what, what is that core PC?
What do you think it is
a month from now or two,
three months from now? You think it's around where?
Well, in the second-half of last year it was
2% in Q3 and 2%
in Q4. Quarterly, how many cuts do we need right
away?
They should, they should go 1/2 point next week then.
Oh, I would be delighted if they went 1/2 point
next week.
Just to be clear, the zero possibility of this,
I know, but I know that.
But you're Ian Shepherdson. Well,
I don't have my hand on the lever of race.
I know you did. If I did,
I voted everywhere. So you think they should go 1/2
point immediately And how many total this year
this. Yeah, I'd like to see them cut by 1:50
in total,
but the sooner they start the better.
You know,
I understand that they, you know,
do you think they ever would go 50 if they
need it?
Would they ever say, holy cow,
we need to go? Well,
not now, but no, I mean,
six months from now they might.
If we see two or three payroll numbers of -100,
they'll do 50s. And I'm not ruling that out.
I've learned over the last four years since it's a
four year anniversary of COVID,
isn't it? I've learned not to say anything is impossible
or to say that anything is certain.
I mean, we've all learned that.
And just because the last few months payroll numbers have
been pretty good and the last couple of months CPI
numbers haven't been so good,
doesn't mean that the next six months will be the
same.
You know, at turning point,
you get surprised. You get surprised in both directions,
but you don't get necessarily surprised consistently.
And this is a problem for the for the Fed
because this Fed in particular wants to be absolutely certain
before they do anything.
And the problem is if you wait until you're absolutely
certain,
then you've probably waited too long.
Yeah, wait to their eyes.
Yeah, well, they they're worried about.
They all think Volcker was died.
Volcker saved the world, you know,
from a horrendous. And they don't want to be Montgomery
Burns.
Oh, no. That's the guy in The Simpsons.
Arthur Burns. Arthur Burns. Yeah.
They don't want to be.
No, they're done. OK. I did not see.
There must be an internal twitching because I did.
Did you see any? You didn't see him?
He looks pretty strong. Income.
You didn't twitch? No. But you know,
this did happen. There's also feeling.
I feel, I feel very twitchy about the labour market,
that's for sure. You do?
Yeah, this labor market looks great until you drill into
the details.
You know, if you look at the payroll,
why would the NFI be try to hide that,
you have to ask them that,
you know. But I look at the the thing,
if I was writing that commentary to go with that
report,
I would have said the thing that really yells out
of the data.
And they produce a lot of numbers,
but the thing that yells out of the data is
three straight declines in hiring intentions.