Expect two rate cuts this year: Citi's Nathan Sheets

Online, joining us now is Citigroup global chief economist Nathan Sheets. So the market odds went up for second cut after we got that PPI report. I think that's where you guys are, despite what we got from the Fed yesterday, Is that right? That's absolutely right. We're expecting a September rate cut. And I think the big take away from the inflation data and from the Fed, the Fed by its DNA is going to be empirical. It's going to follow the data. And I think that we're going to see in coming months, as we saw in May, that those very hard readings for inflation that that we had during the first quarter were something of an anomaly with a residual seasonality or shifts in pricing early in the year, whatever it was. We're going to see some better inflation prints over the next few months, and that's going to open the door for rate cuts starting in September. What about this idea that the Fed has been really spooked by, first of all, going too late when it comes to fighting inflation on the front end? And then this idea that we could see stickier numbers like we got in the first part of the year and it would be such a mistake if they cut rates prematurely. How big of a risk is that? At this point? I think the Fed does see a premature move as being a significant risk, and frankly, I think that's why they're going to wait for several more prints and why July at this stage is probably not on the table. But by the same token, the Fed doesn't want to dig itself in to a hawkish stance of policy for so long that it unnecessarily threatens the economy. And we are seeing, I would characterize it as moderation in economic activity. But some rate cuts later in the year are going to be very supportive for the economy as well. Nathan, you do see some 3 handles come in at least on the benchmark yield this year, right? That's my expectation that I think as we move into this world where you're starting to see the Fed ease up a little bit, I think you're going to see some further adjustments in the in the 10 year yield. And it wouldn't surprise me if we ended the year in that 375 to 4% range as a result of that. And yet we were just discussing how the the slowing macro picture is a little bit more nuanced for equities. And I don't think you see a lot of movement in the S&P going into year end as well. Well, the way I would put it is US equities have had an extraordinary good run since late last year and a lot of favorable news. And I would say, you know, I'm more in the soft landing camp. A lot of favorable news, including the likelihood in my view, of the soft landing for the economy is broadly already priced into equities. And it's just stretches my imagination to think that there's a whole lot of room more for equities to to move up, say, over the next six months. Are you sure about that soft landing call? You feel you feel good about the soft landing even with the Fed being a little more patient than some would like here on the cuts? Well, that, Sarah, that's a very fair question. And one of my favorite quips is the one that economists are paid to worry. So my baseline is the soft landing. Like, sure, I have lots of worries. I think we're in a place where, as I said, we're seeing a moderation in the data. And it is a legitimate debate and it's one that we have internally in city research as to whether that moderation we're seeing is the predicate to the soft landing or to a sharper slowing in economic activity. I think there's still enough momentum in the consumer and the corporate sector and the labor market that the soft landing is the more likely outcome. But in other cases where we've seen a similar kind of slowing, it has eventually manifest itself in a sharper downturn.