The U.S. economy should continue to slow in back half of 2024, says TIAA's Niladri Mukherjee

And joining us now is Neil Mukherjee. He is the chief investment officer of TIAA Wealth Management. Neil, great to have you here. So what do you make of it? I mean, higher for longer to get down to 2% or is that just more job owning? Well, I think that generally speaking, the US economy should continue to slow down in the back half of this year and the disinflation process should play out. So I agree with the comments, which is the Fed is flying at a pretty high altitude at the moment, and they need to move to a slightly lower altitude because as inflation is coming down and if you say stay at that level of interest rates, you're just becoming much more restrictive. So the Fed is now shifting focus from fighting inflation to worrying about growth on the margin. They're not there yet, but I think at some point over the next few months, we'll talk much more with the conviction about the Fed cutting rates. So at this point, talking about slowing down is a good thing. Would you say because a couple of weeks ago there were some jitters in the market that slowdowns might not be so great? Yeah, it's, it's interesting. The the Fed obviously pivoted pretty hard back in December that led to a meaningful financial conditions easing. I think that contributed to inflation firming up. Now we're beginning to see the slowdown that we had been expecting. I think almost a year back, many people were calling for a major slowdown to take place. So you're beginning to see the labour market cool down, you're beginning to see manufacturing again, cool down, maybe even falling back into a contraction. And you're beginning to see mixed signals in the labor market, which is interesting. And the Fed is paying very close attention. the Fed knows that their interest rate policy is a blunt tool and it's way, way lagged the impact it has on the economy. So this is the right time to start preparing the market for eventual rate cuts. I think July is early September is in play because the Fed will look at 3 inflation prints between now and then. If they, if the data breaks in that direction, they will cut rates. One more thing I will say, it's not just the inflation data they will be looking at. They want to see the economy weaken a little bit as well because they want to be absolutely sure that inflation does doesn't come back and re accelerate. So these two conditions, the data on inflation moderating and the economy weakening are the perfect conditions the Fed is looking for. Of course we get that first inflation read this Friday with PCE, which we know is the Feds preferred inflation data. Just to go back to that though, we we also know that labor data can be a lagging indicator and that that can change very, very quickly. So what would you be watching to know that this is just a healthy cool down softening of the economy and not something deeper and harsher? It's a really good question and I think it's a question that many people will be asking over the next several, several months. I think initial jobless claims is the one data that one needs to look at. Obviously, that has started to move higher a little bit now. A modest increase in claims will tell us that the demand for labor is cooling. People are not voluntarily quitting their jobs as much as they used to. That's a healthy slowdown in the labor economy. And the balance is taking place between supply and demand. Obviously, if we go up to like 300 in a hurry here, I think the Fed will be very concerned about the growth side of the equation very quickly. Now, throw an election into this process. We get this first debate between the two presidential candidates later this week, an expectation at least from some on Wall Street that that you could start to add some volatility to the market here as well. How are you factoring that in? And if you take this whole big picture you've just laid out, what does that mean in terms of how you're invested through the second-half of the year? Yeah, it's a great question. So, so elections interestingly hasn't really factored into asset prices as a fair. That could change, like you said, next week or this week. I would say that investors should not change their portfolios based on a view they might have on the elections or a particular candidate who might come in. I would just say that keep the focus on the fundamentals. The fundamentals are still pretty decent for risk assets. When I go back and look at the last 24 presidential elections, go back to 1928, equities on average has produced a return of about 10% in those election years. And sometimes clients ask us how does that happen because everything seems so uncertain during election years. And the reason that happens and equities can continue to grind higher is because equities ultimately revert back to the fundamentals. And the fundamentals that the equities look at are corporate earnings, economic growth, productivity, innovation and standard of living. When those things move up, equities tend to move up. And I still think that over the next three to four years, which is our investment horizon, equities are in good shape.