Episode Details

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen discuss the Fed’s path as inflation remains above its target and the labor market continues cooling.

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----- Transcript -----

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. 

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. 

Matthew Hornbach: Yesterday, the FOMC meeting delivered another quarter percentage point rate cut. Today we're here to discuss what happens next.

It's Thursday, December 11th at 8:30 AM in New York. 

So, Mike, once again, the Fed cut rates by 25 basis points. That outcome was not a surprise, and the markets reacted positively. But there were some surprises. A bit of a divided FOMC, if you will. How did things play out during the meeting and what are some important takeaways to keep in mind? 

Michael Gapen: Yeah, well certainly Matt, it is a divided committee. I think that's clear. 

I think one key takeaway for me is the idea that the Fed is done with risk management rate cuts, and now we're back to data dependent. So, what does that mean? I mean, a risk management rate cut isn't necessarily about the data you have in hand and the data you see; it's your view about the distribution of risks around that. 

So, in some ways, you're not data dependent when you're making those cuts. Now, I think the challenge at this press conference for Powell was to say, ‘Well, now things are different.’ And it was a nuance in the sense that cuts from here, if and when they come, will be data dependent. 

But I think at the same time he did not want to communicate that the bar for those rate cuts were exceptionally high. 

But I think he threaded the needle quite well in transitioning from risk management cuts, which aren't data dependent to an outlook, which is now more data dependent. And I thought he did that artfully well. So, for me, that's the big key. 

Secondarily I'd add a takeaway for me was he seems fairly confident that inflation will be coming down, and I think he still believes the labor market is cooling. The blend of that came across as a bit dovish to me. And then the third thing I would add is he fairly explicitly ruled out the risk of rate hikes. So, I think the combination of those three things: data dependence, still concerns about cooling in the labor market, and chopping off the upper half of the rate path distribution – those were kind of the key takeaways from my point. 

Matthew Hornbach: So, Mike, with respect to the labor market, Chair Powell did address it in a couple of different ways. But one of the ways that stood out to my ears was how he described some technical factors that people are well aware of – that could mean the economy is actually shedding jobs to the tune of about 20,000 per month. 

I was wondering if you could just briefly address what those factors – that are supposedly so well known – might be. 

Michael Gapen: Sure. So, obviously the data that gets released, there are the initial releases and then there are revisions. And in the labor market, there are what are called annual benchmark revisions. 

So, the BLS released a preliminary estimate of that benchmark revision several months ago, and if you apply that initial estimate, it would suggest that job growth in 2025 could be about 60,000 jobs per month, less than has already been reported. 

But at the same time, we know immigration controls are slowing growth in the labor force. So, this is what Powell is calling the really curious balance. How can you have employment gro