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00:00What if the economy were experiencing rates that were one and a half to one and three quarters percent lower right now? What would it be doing? So that is essentially the question of where is the neutral rate? So if you do cut rates 100 basis points, how much stimulus are you expected to see? And I think it's one fair to say and important to recognize that no one really knows where the neutral rate is. We're all essentially examining it in real time based on the data. And so what I see in the data today is that the current level of policy rates, which is a four and a quarter to four and a half, is modestly restrictive. It's more restrictive in certain parts of the economy, like the housing market, like for anyone who is buying big ticket items and financing those big ticket items like like an automobile. And then in other areas of the market, it does not seem to be as much of a challenge. So if you think about financial conditions, indices, they have continued to ease. And, you know, for those who are looking to borrow money in the public corporate bond market, for example, the market is essentially wide open for them. So it's a mix of views. But what I what I can say is that I do feel that the current policy rate is still modestly restrictive. Yeah. Cathy, let me come to you now and ask you pretty much the same thing. I want to point to John, authors of Bloomberg Opinion writing this week saying this is breathtaking, but the current effect of Fed funds rate at four is 33. He as investment is suggesting that it should be about 2.6%. Over the last 70 years, the rate has never been that low with inflation as high as it is currently. What are your thoughts on where the neutral rate is right now? Well, I'd agree with Kelsey. We're all trying to figure out where the neutral rate is, but I'm not really sure where the treasury secretary got that estimate because there's nothing that I can see in the data that would suggest we need rates slashed back sharply. And in fact, I think that that would be fairly inflationary, both on the asset price side and on goods and goods and services. So it's really difficult to see to make a case for that big a cut in rates unless you're really looking for the economy to fall off a cliff. I do think that there's room for a 25 basis point record at the September meeting. That's kind of been our call all year because we think that the impact of tariffs and some of the federal government spending cutbacks will work their way into the numbers, particularly the employment numbers by the fall. But going much beyond that, maybe another 25 by the end of the year. We really have to see the data play out in such a way that consumer spending really continues to slow down. We're hiring again. It's much weaker than it already has and or the unemployment rate moves up and I'm not convinced any of that's going to happen. So 25, maybe another 25 by the end of the year, but 150 or so, I have no idea where that comes from. So the data this week, you know, much as we saw PPE be a little bit dangerous or maybe a red flag, you are not concerned so much about the labor side of the economy, about consumer weakening, about all of the corporate earnings that we got that suggested that some consumers are skipping breakfast and things like that. Well, I do think the economy is slowing down, and that's why a 25 basis point rate cut in September and probably another one by the end of the year makes sense. But the offsetting factor is unless that unemployment rate really moves up or hiring really goes into negative territory, it doesn't look like consumer spending is falling off a cliff. So we saw the retail sales numbers today are not bad numbers. And when we look at the inflation side of the argument, a lot of the increases are still in the service sector side. So we're not getting as much offset on the goods side. And we've had a 10% drop in the dollar that's going to feed its way through and import prices. And in fact, ex petroleum import prices were up 3/10 of a percent for the last month, and that's the highest rate seen in a year. So there's a lot of components here where although we see slowing in the economy and we do think that that will influence the Fed to cut rates, we don't see the cycle playing out for a series of rate cuts absence a real decline in the labor market. Yeah, Kelsey, we were just looking at the chart there that showed traders pricing out just, you know, ever so slightly the prospect of a rate cut in September. Is it a done deal? So it's not a done deal? I would say the most important data point between now and the next Fed meeting is the next payrolls report. So I think, Kathy, I agree with the assessment that the really big game changer for the Fed and for this market would be if you start to see material increases in the unemployment rate, because right now the market is looking at an economy that's slowing consumption, that's slowing, payroll growth, that slowing. But there's enough ambiguity about why it's slowing and if that slowing is going to continue, that it's not necessarily causing the Fed to need to move more aggressively. And I think what changes that is if you see an increase in layoffs, an increase in claims, an increase in the unemployment rate. But I think if we get a jobs report in for the September data point or for August, that is essentially consistent with the current trends the Fed is going to deliver on that 25 basis point rate cut. Kathy, we have Jackson Hole next week. Typically, it's you know, well, I shouldn't say typically, you know, there have been times where it's been a non-event, but there have been plenty of times where it's been an event as well. What kind of message do you think the Fed chair will want us to take away? Yeah, that's a great question, because I don't know what to expect from Powell at this one. I think he'll want to be consistent with his recent statements saying that they're they're balancing the dual mandate and right now they're still further away from their inflation target than they are from their unemployment target. That being said, I think he also wants to open the door to the possibility of a rate cut in September, because I do think the the last labour market reform was probably a game changer for the Fed. You've certainly heard some outspoken members of the Fed talking about rate cuts after that, but I think it probably will sway sway them in favor of a rate cut. So he wants to leave the door open to that. But I also think that this is Powell's legacy and he doesn't want to be going out with inflation elevated and looking like they've abandoned their inflation target. So my guess is he'll try to walk a line, open the door to rate cuts, but also concede that, you know, the future is still uncertain and they're waiting to see the full flow through of impact from tariff policy and some of these other federal policies that have taken place have created a lot of volatility in the numbers, a lot of volatility in terms of just expectations. And and I think there's a good point on those those consumer expectations numbers. The Fed does watch inflation expectations pretty carefully. And although survey data can vary a lot and we know that there are some some issues with that, but, you know, we're not really seeing the inflation expectations numbers come down to a level that probably gives the Fed a lot of comfort in terms of going forward. So I think he'll try to walk that line. Same to you, Kelsey Jackson, whole next week. What are you anticipating? Right. So I think that what Powell would ideally like is for his comments to not necessarily move the markets and let the markets reprice the probability of a rate cut based on the data flow itself. So it's not about what people are calling for in the White House or at the Fed. It's what the data is going to guide them to do. And so when you saw the market reprice after the last jobs report, that's what brought us from a 50% probability of a rate cut in September to close to 100% probability of a rate cut in September. And that next jobs report, that's what's either going to keep us at 100% probability of a rate cut in September or. War caused people to to question the necessity of a rate cut, because really what has shifted in terms of the Fed's reaction function most recently, it's not that their base case has changed. I think that they continue to have the same base case view for the US economy. It's the risk management. So essentially they were more concerned about inflation a few months ago. Now there's a possibility that they need to be more concerned about the labor market.

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Current Policy Rate Still Modestly Restrictive: JPM's Berro

Kelsey Berro, Fixed Income Portfolio Manager at JPMorgan Asset Management and Kathy Jones, Chief Fixed Income Strategist at Schwab discuss where the neutral rate should be with Bloomberg's Vonnie Quinn on 'Real Yield.' (Source: Bloomberg)

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