Morgan Stanley's Ellen Zentner on Fed: It's okay to cut

Ellen, it's great to see you at a perfect day to have you on. I don't know if you think we're at an important juncture here or not. I do think we are the important juncture. I think that, you know, Chair Powell said. We're being cautious. We're being conservative and that's fine, right? But the data is slowing and he even confirmed that in yesterday's meeting. You could look at jobless claims today. We do think this is starting a pattern similar to last year where we started to see the data weakening at this time, but it's weakening from already a lower level, right? So we think job gains will be weakening. Here. You can see the inflation data. I think the month over month sequential pace over the next couple of months is going to be very much in line with the Feds goal. And So what does that mean? We think that just rip the Band-Aid off. It's OK to cut and it's OK to keep cutting and chair pal is nimble. And if you're nimble then just move around the data as it comes in. If it turned out you started cutting too soon, why do we need a rate cut? Why do we need it if, if the economy is doing OK, if inflation is trending a little bit lower, if employment is within a band of satisfactory? Well, so you're describing a great economy, right? And everything is slowing satisfactorily. So if it is slowing, you don't need to keep rates at this restrictive level. You should be cutting rates in line with that slowing activity, in line with that slowing inflation. Rates are about balanced right now, as Chair Powell believes, keep them balanced and to keep them balanced, you've got to cut rates as the economy is slowing. So let's talk a little bit about the labor market piece of this. Ellen. We spoke with Dean Mackey last hour who's not convinced this is the start of a more significant slow down for a couple of reasons, including kind of household balance sheets, not the excess savings piece, but more just kind of income to debt levels, things like that. They're in pretty good shape. Do you think we can weather weather this, whether the headwinds, I guess I should say, and and make this expansion continue for another year or two? Yeah. Look, I think that those with good balance sheets and look, Dean Mackey, amazing analysis. I've known Dean for a long time and he has really got his finger on the pulse of household balance sheets of financial wealth, housing wealth and how that impacts consumers. And so he's absolutely right. That gives you a big cushion. But guess who it's cushioning those with the better balance sheets, those without good balance sheets, those at the the middle to lower and lower income levels of the spectrum are hurting. And now it doesn't look like a hurting consumer because the wealthy, those that have real estate assets, those that have financial assets, those that are sitting on savings, those are doing well and they are out there spending. So yes, can we withstand this for longer? Absolutely. But we're also hanging our hat on one segment of consumers that if they decide to stop spending, then you will really see economic damage. So your, your prediction is as I read it, 3 cuts this year that would take the Fed funds rate down what to about four. It would take it to about no, we're at 5:00 and 4:45 and a half now. So we would take it to around 4 3/4 by the end of this year. But we do, we do expect them then to continue cutting through the middle of next year. And that's informed by two things. It's informed by our forecast for inflation that we're going to continue to hold these lower month over month sequential rates of inflation, so more in line with the Feds goal and that the economy is going to continue to soften. So it still takes us to a 3 1/2 percent by the middle of next year. That's still by that time a restrictive policy rate or around where we think it is neutral. And there we think the Fed pauses and then we have to think about what happens next. the Fed could be hiking as the next move after that. Wow. We we've had on in the past couple of days Don Peebles, who is obviously a very astute real estate investor and an astute observer of of the economy and of the culture and society as well. He argues that there is a major lurking banking crisis attributable at least in attributable to struggles in commercial real estate, which are attributable at least in part to the fact that interest rates have stayed too high for too long. Do you see a similar risk of a mid sized or small bank crisis on the horizon? Well, look, I think that that those segments of commercial real estate, of households, of small businesses, anyone that is more exposed with more balance sheet exposed and is in a riskier situation with high interest rates for longer are going to suffer the effects the longer interest rates are high. The question is, is that a segment of the economy that is large enough to drag down the whole economy and is it enough to create systemic risk? And I think from a seat, from a CRE perspective, I would say no. And I would say I've seen the Fed do a good job of segregating that area of CRE, of wrapping their arms around that part of the economy and trying to cushion the rest of the economy from those troubles. But these are the things that keep policy makers up at night, right? That where where are we is policy balance? Do we need to ease it just a bit? And This is why I think that the Fed should get started. And Chair Powell prides himself on being nimble, that he can move around the data, put aside concerns that you don't want to make past mistakes and start to ease policy too soon. Inflation expectations are anchored. Go ahead, cut rates, and if you've done it too soon, if financial conditions get so easy that you start to see upside risk to inflation again, then just start hiking again.