Economist Brett Ryan warns that one factor could have a major impact on markets in the months ahead.
Transcript:
CAROLINE WOODS: Well, as an economist, what are you more concerned about — a labor market that continues to cool, or inflation that’s come down a lot but seems like it’s creeping higher?
BRETT RYAN: I think inflation. In our view, inflation risks are greater at the moment because you have these rolling impacts of tariffs. At the same time, from a growth standpoint, you have a tax bill that was just passed that’s going to add 20 to 30 basis points to growth. So a bit of support for labor demand.
At the same time, the Fed’s been away from its inflation target for five years now and has not gotten back to target. And the time period to which it’s expected to get back to target keeps getting pushed out. That risks un-anchoring inflation expectations, and inflation-fighting credibility would be very difficult to regain over the longer term.
So it’s less about cutting in terms of what their policy rules would tell them. They should be above the neutral setting. They should be slightly — a slight tightening bias. The question is how much tighter should they be. And so we think neutral is closer to 3.50 rather than the Fed’s view of 3%. So we would have them only cutting a few times. The pace is determined by the data. And today’s data would argue for a bit of a quicker pace than what we have baked in. But it doesn’t change our overall view of the trajectory because, when you take a step back and look at the broad labor market picture, not much has changed.
There are reasons to think that we’re going through the same sort of seasonal pattern that we did last summer, and that jobs will pick up again in the fall.
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