I want to start with this morning's PCE
figure, of course, coming in bang in
line with expectations on pretty much
every single measure. What do you make
of a print such as that where there were
no surprises at all when you're thinking
about how the Fed is actually going to
proceed next month?
>> So, with everything that we're dealing
with this year, a number that comes as
expected is actually not a bad thing. Uh
we're hoping for a quiet day. So, it it
comes in as expected. to your point it
is above the 2% inflation target but it
was not higher so at least that was good
news particularly as the Fed as chair
pal seemed to indicate is on this
riskmanagement approach we had that weak
payroll report or the with the revisions
I think there's concern at the Fed and
I'm maybe part of that group concerned
about is the labor market losing
momentum and they they know that
monetary policy is restrictive so I
think the inflation report allows them
to reduce the level of restrictiveness
we know we're living with tariffer
they're the dual mandate of the Fed is
intention, but the inflation number
hasn't picked up to the point where they
might say that hold off, we really can't
start to cut rates. So, I think the the
labor the the inflation report allows
them to cut rates as they've signaled
that labor report next week is really
important. Whether it's a 2550, what
happens after the 25, I think that's
what we need to see. We know the labor
market's slowing. Is it slowing in line
with structural issues because of break
even numbers are lower because of
whether it's AI or immigration or is
there something cyclical? I think that's
the big question we're grappling with.
Ahead of that, I think the Fed. So, what
this means for the Fed is I think they
can cut that 25. It's really what's
next? How many more cuts? Where's the
end point? All of that. I think we need
that labor report. I'd say more
important than even that inflation print
today.
>> Well, let's uh bring that topic over to
George Borie because Priya makes an
interesting point that okay, you take a
look at the odds for a September rate
cut. They're hanging out at about 88%
right now. I'm going to go ahead and
call that a lock. But when you consider
the trajectory beyond next month,
George, is it going to be the labor
market that is the key?
>> Well, as as uh as as Pierre mentioned,
you know, it's it's very much they're
still data dependent whether whether we
want to call it that or not, they are
data dependent. There's certainly air
cover. There's room, there's rationale
to start to cut rates. The labor market
is shown clear sign of deceleration and
there's a very mixed bag of growth. You
know that that on average growth also
seems to be slowing although you know
the second quarter numbers still looked
pretty pretty solid and third quarter is
holding up reasonably well. But with the
labor market showing signs of slowdown
they can cut. It's just a matter of pace
and and and I think that's what you're
mentioning is is absolutely critical. it
it doesn't appear to to need to be fast
and furious at at this point that that
you can start to incrementally lower
rates, align that with a labor market
that's showing some sign of softening,
but you have to be very respectful of
the inflation backdrop which is kind of
stuck. We're stuck at slightly above
target. And the question is, is that
going to go down? It doesn't appear to
be going down anytime soon, but if the
Fed wants to look out a little bit over
the horizon and say slow and steady for
now and then we'll have to see how
inflation evolves. That seems like a
very practical, very realistic approach
at this point in time.
>> Well, the phrase that we're using,
George, stuck when it comes to
inflation. I mean, I think the chart
told the whole story. That looks like
where we are. And I want to talk about
this in the context of the Fed's dual
mandate. You have the labor market, you
have inflation. Of course, that's what
the textbooks tell us. Do you think that
those two sides are in conflict? Because
if I take a look at today's reading,
core PCE on an annualized basis at 2.9%.
If the labor market does weaken
materially here, I mean, what kind of
magnitude can we talk about when it
comes to Fed cuts uh with inflation
still around those figures?
>> Yeah, that's that's an excellent point.
And that's why we think it's going to be
very measured. Like they do have room to
incrementally cut rates, but it's going
to be meeting by meeting that to be able
to forecast sort of a rate cutting cycle
that's going to drop a 100 more 100
basis points or more. It's premature at
this time. There is kind of the dual
mandate conflict that that that you
mentioned. And and the other is is with
respect to to to inflation is to as to
like what will be the drivers to sort of
bring it down. Is it g does it have to
be growthoriented or can it be organic?
Historically, it needs to be growth
oriented to get inflation down. And from
the Fed's perspective, we think there's
really one, you know, there's an
important aspect to this. It's
confidence, market confidence in its
ability to get to target and to maintain
their inflation fighting credibility.
Powell's doing a pretty good job, but
he's trying his best to preserve that.
and and and that's what the bank overall
is is trying to preserve as we get sort
of pressure from from from the
administration to ease rates in the face
of what is still very persistent stuck
inflation. So we kind of watch the long
end. We very much watch break evens.
We're very much looking at term premium
in here to kind of calibrate like is the
market getting uneasy? There is some
signs of that as you pointed out earlier
but we haven't sort of fully
capitulated. The bond market is still
largely holding together and
particularly important we think are
those break even inflation rates 10 and
30 years out which are which are holding
in reasonably well but still showing
some signs of upward drift.
>> Yeah, absolutely well behaved for the
moment but as you said uh also a
direction of travel higher. Pria, uh,
George touched on the concept of Fed
independence, and we have to get to one
of the big stories that's happening this
week, and that, of course, is what's
going on between President Trump and Fed
Governor Lisa Cook. What's interesting
to me with all the drama of this week,
of course, Trump asserting that he can
fire uh Lisa Cook, Lisa Cook then suing
Donald Trump, is that you really haven't
seen much reaction in the bond market.
We know what the worst case scenario
might look like. uh long end yields
going higher but haven't really seen
that anxiety come through in pricing
>> right and I think you know we should
look at the bond market absolutely I
stare at it all the time the the curve
has steepened a little bit but I think
you can attribute a lot of other things
to that steepening the fiscal trajectory
global term premium going up but if
really we were concerned about Fed
independence really getting challenged
here I think equities would be much
weaker I think credit spreads would have
been wider the dollar would have been
much weaker there is uniform agreement
ment among economists, among market
participants, among global policy makers
that you want an independent central
banks. I think it's one of the basic
tenets of a of of an of a you know
developed economy of US exceptionalism.
I really think the market is saying
there's an institutional gu there are
institutional guardrails around the Fed,
whether it's the Supreme Court decision
from earlier this year, whether it's the
fact that there is a diversity of
opinion at the Fed. We really don't have
clear political leanings at the Fed. I
think, you know, we've got the 12 people
that vote. You've got that, you know,
all the board members. I think the
market saying this is sort of drama. We
can look past it. I don't think the
market's really seriously pricing in a
loss of independence. It would be
extremely serious if that happens. Maybe
I'm naive, but I do think that those
institutional guard rails are there to
protect that Fed independence because
everyone I think the president wants an
independent credible central bank
because that tenyear is the policing
authority for the market. If the market
gets a whiff of a non-independent
non-credible central bank, you're going
to see those break evens much wider.
Long rates will rise. The Fed really
won't be able to control the long end.
And then you know that that's when the
bond vigilantes sort of wake up and
every market wakes up and t uh takes you
know uh notice of that. So I think it is
a risk. It's it's absolutely something
we should keep an eye out for. But I
would put that in the realm of a big
tail risk maybe starting to get priced
in. I think the market's still looking
at a credible central bank and the you
know growth slowing inflation staying
sticky and how we're navigating. Can we
stay in that soft landing? Can the Fed
cut just enough to keep the soft landing
going? I think that's the key focus. But
you're right, we should all, I think,
keep an eye out for whether that
independence is threatened or