Bruce Knsman, chief economist and head of Global economic Research at JP Morgan joins us Now for more. Bryce, let's talk about this the FED decision today, with expectations high, we get some kind of guidance about maybe a March rateca At the same time, on Friday, we're looking for payrolls growth still close to two hundred k. How do you reconcile those two things, Bruce.
Well, I think what the Fed is going to do today is open a door, but basically tell us it hasn't decided when it's going to walk through it. And I think there's a story here about inflation coming down that's encouraging them. But there's also a story about the economy looking pretty strong here, which is raising questions about how restrictive actually the five and a half percent policy stances they're going to grapple with that. I think for a while, I think the data is going to tell
the tale. We've got this two CPI reports before the March meeting, we got two payroll reports.
We're looking for a strong payroll report on Friday.
I think most likely the strength of growth and I think some firming in goods price inflation. We're expecting is going to slow the FED down and have them wait in March.
Bruce, We've got plenty of questions around the table about the labor markets, so let's talk about it a little bit more. You're looking for north of two hundred can I think on Friday the meet and estimate in our survey. At the moment it's one eighty five unemployments below four percent. I think you've raised the right question. What evidence is there that we ask quote sufficiently restrictive given what we're seeing in the labor market.
Well, I think an interesting question.
I think they will use that language and the statement today sufficiently restrictive. Many FMC members have been basically emphasizing that policy is at a restrictive stance and should.
Start to come down.
But the economy did very well at the end of last year. It's carrying continued strength into the start of the year. I think the labor market is showing some reduction in churning, some reduction in labor demand, but there is demand starting to pick up in some sectors of the economy, and I think job growth is going to stay strong here. I think the unemployer rate's going to stay below four percent. So I think they've got a
tough balancing act here. How they talk to us about that balancing act between inflation progress, strength of growth, and importantly, how they interpret financial conditions becomes really the color we're going to get today in terms of thinking about where they stand.
I find this labor market incredibly confusing right now, and I'd love your help to try to understand it, because you see it as stronger than the average person on Wall Street. We've heard about those slew of layoffs ups PayPal, Google, Amazon City, Macy's, you can go on and on. Yesterday we got the jolt state of the job openings data, and when you look beneath the hood, you can see the level of quits. People actually quitting fell to the
lowest the rate going back to twenty twenty. At what point are we seeing real time weakening that just isn't making its way into the overall headline data.
So I think we have to distinguish between a normalization and weakening.
And remember the labor market was.
Unusual over twenty twenty one through early twenty twenty three, as we were really normalizing back after a COVID shock that was quite perfect. So what I think we're seeing now is pace of job growth slow. I think we're seeing less people leave jobs. I think we're seeing wage inflation come off at.
Very high levels.
But I think we're also seeing in the high frequency data a sense that things are starting to stabilize, and stabilize at a reasonably strong pace, consistent with the fact that the unemployment rates below four percent, consistent with the fact that the economy is growing at a three percent pace here. So I think we have to be a little careful not to get carried away by momentum that's reflecting the normalization after outsized strength in the labor market over the last two years.
How do we know that we've really killed the potential for a wage price viral if we do see this ongoing strength underpinning Yes, i'lbe at some kind of peripheral layoffs, but otherwise, as you say, a very strong labor market.
I think the term wage price file is too extreme in terms of what the debate is right now. I think we've seen that the shocks that pushed wage inflation up, that pushed inflation up, many of them have gone from the scene, and we're not with a threat that inflation is going to be four or five percent. I think we're debating within a range of is inflation settling back towards the fed's targeted two or are we getting stuck
somewhere around three? And there's a story there which we're seeing with wage inflation, which looks like it's still running above four percent, and you're asking, well, how well is productivity doing, how much pricing power do companies have, Whether the big drops and goods pricing we've seen in the last few months is a bit of a temporary phenomenon, and how much further progress are we going to see
on shelter cost service price inflation. And these are all questions which we haven't answered yet, but we're debating with the point about is inflation coming all the way back to the low twos or is it getting stuck somewhere around three? And neither of those is a wage price spiral. That's not really the dynamic of this economy right now. But three percent inflation is too high for the FED, and we'll certainly slow them down, if not stop them, if that's what the data starts to show.
Bryce. I just wanted to hand relevant the FEDER reserve actually is to this conversaying, we've talked about them so much over the last two years. It's interesting, isn't it just how race sensitive is this economy? If high rates then slow it down, will lower rates speed it up? Bruce, I don't know the answer to that. How relevant is the FED?
I think that's a really important question, and I would just say two things here. First of all, I think last year we had a very significant drag coming from higher interest rates on housing other durable spending. Monetary policy did do damage, but it was offset by fiscal stimulus, It was offset by sharp falls and energy prices, and
it was offset by still benefits of COVID normalization. I think now we're in a really interesting position because monetary conditions are still tight, borrowing rates are still high, bank lending standards have tightened, but financial conditions have eased a lot. And that juxtaposition of tight monetary conditions and easing financial conditions is really unprecedented, and how it plays out in economic performance is uncertain. So I think in that regard,
your question is really spot on. This is a really tough tough economy to get your hands around in terms of what the fed's transmission is doing.
As we look to twenty twenty four.
I'm so pleased you brought that out because I'd introduced another dynamic as well. This conversation today about higher real interest rates, the FED sort of allowing passive tightniggas inflation comes down and keeps nominal rates steady. Bruce, is that offset my bets a real incomes in America?
Well, first of all, I think it's wrong to say that there's a mechanical link between inflation and real interest rates. That depends on how people think about the forward path of inflation. It depends on how interest rate markets, as we discussed a minute ago, of feeding through the financial conditions. But I do think the point you're making is important.
One.
The rise the fallen inflation is a reduction of a set of supply shocks that hit us. As that's happening, that's a boost to household purchasing power, and we can see the consumer respond to that. The good news is that income is also being generated by the corporate sector right now. It's not a move away from corporate profits.
As we're generating strong demand overall, and as we're generating what has been pretty good productivity outcomes, we're looking for a three percent quarterly gain in the fourth quarter productivity print tomorrow, which would be pretty impressive.
Just quickly, Bruce, to wrap this up, economics tries to be agnostic when it comes to politics, and it tries to look at these very specific issues and calibrations of inflation and labor markets, but it's hard to avoid the politics. This year, a lot of people saying the FED is going to try to get an earlier start to avoid
cutting rates more aggressively right into the election. We're also, though, hearing from congress members sure at Brown the latest in the Senate saying, I urge the Federal Reserve to cut rates. How difficult does that make the situation for the FED? How does that factor into your considerations?
So I think we should not consider the FED as having an explicit political lens in terms of their policy setting, But the FED is operating in a political environment, and I think there is a sensitivity there that if the FED was slow in lowering rates and the economy did fall as we moved into the election campaign season, that they'd be politically vulnerable. So I do think there's a bit of a bias here that if they think they're going to ease that they probably started a little earlier.
That does weigh on our thinking. It hasn't pushed us to think they'll go all the way in March, but I do think that's a consideration we should have in our minds.
Hy Bruce is trying to catch up to get your thoughts, Bruce Kaslan, the of JP. Morgan