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We're on Central Bank Watch Markets fully pricing in a September rate cut for the FO ANDC after some encouraging signs from recent inflation data. Here to talk about maybe what we might learn out of the FED tomorrow as it makes that big decision is rober Ram Rajan, Professor of Finance at the University of Chicago Booth School of Business and of course former governor of the Reserve Bank of India as well as a former a chief economist
over at the International Monetary Fund. All Right, rajer There's been a lot of talk right now about the idea that the FED and all the data points that we've gotten leading up to this meeting basically leaves it with no choice other than to at least telegraph some type of cut sometime in twenty twenty four. When you look at the data that we've gotten so far, do you think that would be justified?
Yeah, I mean, as far as the FED goes, I think all the data, recent data point towards, you know, things moving in the direction at once. It's not there yet, but it's moving in the right direction. Certainly, chem and Paul doesn't want to commit himself in his post decision talk to a cut in September, but he wants to hint as much as he can.
I think the FED is seeing well.
Inflation is nearabouts where it wants to be, two and a half percent on the core PC is getting there, and labor markets are certainly cooling at least when you look at unemployment claims, openings are down to one point two per unemployed person and quits a low and stable at below pre pandemic levels. So other than the jobs numbers, which are still in the one hundred to two hundred range, it is a labor.
Market that seems to be cooling off.
And of course there are other parts of the economy we're just showing signs of some stress. I mean, housing isn't great, and of course you look at credit card defaults and all that. It's starting to pick up. So the FED is saying we're nearly there. If wait too long, we see a slowdown, which we don't want.
Well, well, that's what I'm curious about, particularly when it comes to the consumer side of the equation, household spending and the idea that we have started to see softness there at least softness that showed up in the official data, and of course there's a ton of a acdotal evidence out there that households have at least started to rethink just how much they spend on discretionary items. How much does that that particular data point have the factor into this decision.
It does weigh into the Fed's decision.
But remember that at the aggregate level or the overall level, the economy is still chugging on pretty strongly. The second quarter growth numbers were really quite quite strong at two point eight. And what you're seeing is, you know, for every sort of bit of weakness that you hear about, there is potentially an offsetting strength. What the FED doesn't want to do is maybe, you know, cut in July and then see things pick up. There's also the sort
of uncertainty surrounding the election. How much do they want to ease before the election only to see an administration come in which may change things.
On the ground substantially.
So I think a gentle cut, if the data cooperate by September, is what they want to sort of signal, and I think it'll be hint Hay and down Sinach without any kind of commitment tomorrow that they will cut in September.
To give themselves maximum optionality, as they've been careful to do each step along the way. So Rabram, you had mentioned that the labor market seems to be cooling, But I look at the estimates for job growth for the jobs of what we're going to get on Friday, and an estimated one hundred and seventy five thousand jobs added after two hundred and six thousand jobs are added in the month of June. You don't really see signs of cooling as much in new jobs growth as you do
in say jobless claims or job openings and quits. Does that matter that mix?
That's right, I mean it's not telling the same story. But then you know household surveys, for example, are telling a different story from the payrolls. So I think, again, there are lots of data out there. Depending on your persuasion, you can find something to satisfy you that cuts up way over you, or you know, we should wait a little longer. I think the fad is going to be fairly pragmatic and say, well, we don't have any economy that's tanking yet, and if it does show signs of weakness.
We can always cut a little faster. So for now, let's hold and see what happens, and we can cut September.
Do you believe ra rum that we're going to get a unanimous decision? And I asked that because Bill Dudley, of course, a former New York FED president, wrote an opinion piece for US where he said he has changed his mind and now sees the need to cut this month as opposed to waiting until September because that increases the risk of a recession. Will anyone stick their head out on that idea when it comes down to a bout tomorrow.
It's not an entirely bad outcome. If one or two depart from the overall decision, especially towards a cut. It shows that the FED is debating things, and in this environment where the political pressure on the FED will start amping up before the election, it's good to show that the FED is mildly split.
But you know, let's see.
I don't know if they will engineer that or it will come because of natural differences in opinion. But I don't think it's the end of the world if there is a little bit of a split.
Right, I have to ask you a little bit about what's going on overseas, because there's been a lot of talk about the idea that we might start to see significant divergence in central banks. We know the ECB has already cut. There's a big question as to whether they'll do anything else again and whether they went to early.
But I'm wondering if it actually matters this time. I know we used to in the past focus so much on the correlations between these central banks raising and cutting at least somewhat in sync here, but is that sort of the wrong thing to look at this cycle?
No, I think it does matter. You can see the problem with Japan. Right when Japan was holding firm on a relatively mild monitory policy while everybody else was tightening, you saw a weakening of the end and that has had an impact domestically, both in terms of consumer confidence as well as inflation. Now it would seem this week tomorrow Japan has to make a decision and probably start raising rates, even as the rest of the world is
starting to contemplate cuts. So you know that does have to be an equilibrium, and it doesn't sort of emerge. You see the effects in exchange rates, which eventually cause you know, central banks to have to adjust. I think the ECB is seeing weakness in Europe right now, so they actually have a greater reason to cut in September than potentially the FED has at this point.
Well, it's interesting you bring up Japan because obviously they're going in a different direction than everyone else, and maybe
that's a good thing. I am curious. I mean you've seen a lot, of course, going back to your days at dimth and then of course at the Reserve Bank of India, when you look at Japan and this multi decade doll drums if you will, that it's been in do you look at what's happening now as sort of a real upcycle, the idea that they're finally breaking free from the past and moving on to something better.
I think they are, and it's not just monetary policy. Of course, a lot of work on corporate governance. There is now a greater sense, for example, that Japanese cooperations have to deliver a value for money to their investors, and there's been a lot of pressure on them.
To up their game.
So I think Japan has spent a lot of time in the doldrums, but is slowly starting to come out for a.
Variety of reasons. You know, this time is different.
But of course Japan still has the huge aging problem that you know other countries are yet to confront but will eventually, and how they manage that is going to be really important. How much immigration do they allow? How much immigration can they sustain? So it still has problems, but I think at least the malaise from the Great Recession and the slowdown after that is finally coming to an end.
All right, rob Ram, we started with the FED. I want to end with the FED. What is the headline going to be tomorrow when jape House speaks? Where could he surprise everyone?
I think he's going to try and not to surprise anyone. He's going to try and say, look, we're still in data contingent more but the data are cooperating right now, and you know, if things go the right way, you guys should expect some good news in September.
As far as Reid Country School, that's sort of the message.
I don't know how clear he's going to be, yeah, but that's the message.
He is probably going to.
Say, all right, all right, we've got to leave it there here and always great to talk to you and great to see that view. You know, I'm not sure exactly what way your windows facing, but if you turn to the left of the right, you actually see the home that I grew up in right down.
The street, the University of Chicago right now.
Right down by Medici. I don't know if it's sill there. Rag Aaram Raja and always a pleasure. Professor of Finance at the University of Chicago Booth School, the business former Reserve Bank of India Governor