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Let's take a look at the econ side of things because we got a slew of data out this week countering some of those worries of a hard landing and easing the recession anxieties. The next read is University of Michigan's consumer sentiment index. That's out later this morning. It's going to give investors a little bit more insight on the state of the consumer here to impact what this all means for the broader economy. We want to bring in Tiffany Wilding, Pimco's managing director and economist, Tiffany. It's, it's great to see you here this morning. So let's talk about some of the data that we got out this week. We had jobless claims easing some of the fears that we're starting to see the labor market fall apart. You once again had strong retail sales or stronger than expected retail sales. What does that tell us about the odds of a recession? Has that essentially been taken off the table for now?

Well, so, um, I think the concern was that, uh, we were in a recession right now. So, um, when all of these sort of recessionary fears started, it was because the so-called Sahm rule, which is looking at the unemployment rate from the labor market report, um, has has triggered that. So in the past when you've seen, um, the unemployment rate increase, uh, a certain extent, um, beyond a quote trigger, historical trigger, it has suggested pretty universally that the economy is in recession right now. Um, however, if we look at the underlying drivers of the recent, uh, unemployment rate rise, they're actually quite different than they have been historically. And you always want to be careful of this time is different comments, but we've had an extremely, uh, good labor supply gains over the last few years. And obviously that's been helped by the immigration surge that we've had. Um, and when you have labor supply gains that's driving the unemployment rate, instead of actual, uh, levels of employment, labor shedding, job losses, you know, then that suggests the economy is slowing for sure. Labor markets are becoming in better balance, but it, you know, we're not in a recession right now. And I think that's what was the fear last week. And of course, this week's data, including the retail sales data, just completely dispelled those fears.

I mean, you have Goalsby out saying that we are seeing some flashing signals of recession. So, you know, of course, the Fed is going to be walking a tight rope here of trying to make sure that they're able to pull off a soft landing. A soft landing that which many economists had told us that was already, that was already done. And so at this juncture, if you still see some of those potential signs of recession, where does that put you in the camp for the type of cut and the pathway of cuts that we should expect from the Fed?

Well, you know, I think when, when we look at the balance of risks, uh, to the outlook, what we see has has changed, uh, more dramatically recently is the balance of risks around inflation. Um, you know, the inflation data, uh, has has given us and should give the Fed, you know, much more confidence that we are seeing progress again. Uh, you know, shelter inflation in the United States, which had been elevated, it tends to be, uh, you know, very connected to the labor market, domestic, uh, you know, labor market pressures. You know, the that piece of the, uh, the inflation basket, you know, that's started to moderate again, uh, kind of recently. That's important. Also the context that you see job openings, vacancies to the unemployed, that level, those levels have gone back to pre-pandemic levels. You know, so I think, uh, you should we we have seen a change in the distribution of risks around inflation. And I think that's important. And so what does that mean? Well, means that, of course, the Fed is now going to be, you know, much more focused on any sort of weakness in the economy. And we do think growth is slowing. Um, you know, growth was with 3% last year, very strong pace, um, above trend pace. You know, we think it's slowing and that's kind of healthy, uh, this year. Um, but you know, so it doesn't necessarily mean that we're going to slip into a recession. I think there's still, um, you know, very firm pieces of the economy, solid pieces of the economy, including, uh, consumers overall. But of course, the Fed will have to be vigilant to that. And, and because of this distribution of risks changing on inflation, you know, it does mean they can start to reduce policy. You know, much less need for restrictive policy in that environment.

And Tiffany, going off that, just the fact that we have seen maybe this shift in sort of the risk that is posed right now to the economy, does the latest inflation print, does that almost give the Fed more permission to solely focus on or put more focus on, maybe it's a better way to put it, on the jobs data? And what is your assessment of the labor market right now?

Yeah, I mean, so I guess the way that I would, I would say it overall is that I think the economy, the US economy is just finally getting back to a more normal state after the unique set of factors that hit it during the pandemic. And if the economy is back in a more normal state, then you don't need monetary policy to be restrictive. You need monetary policy to be back in a much more normal state, right? And of course, there's some uncertainty around what quote normal means for monetary policy, but it's probably not, uh, you know, kind of the almost five and a half percent, uh, rate levels that we're seeing now. So yes, I think the Fed will start to ease back to where they think more normal levels of monetary policy should be in the long run. Um, you know, in terms of the labor markets, you know, again, we do think they are easing. They're absolutely easing. Um, you know, we are seeing labor demand, which is easing. Um, and, and that is healthy, you know, just given the extreme labor shortages that we saw post-pandemic. And we're not only seeing this in the United States, but we're seeing it happen across the developed markets. So we're all just getting back to a more normal working environment. Um, you know, and again, that just suggests that monetary policy should should also be more normal.

Last week there was a lot of high hopes and probability for a 50 basis point rate cut. Are you, do you want to see a 50 basis point cut from the Fed or would you like to see an easing into that policy in that cutting cycle?

Yeah, well, I mean, I think, you know, ultimately, usually historically, when the Fed has cut in these larger increments, it's because the economy, um, is more clearly in recession. Um, and so they've needed to not only get policy back to neutral, but they've needed to get it in accommodative territory. Um, you know, I think, I think now there's a question around, um, how quickly should the Fed just get back to neutral. You know, as I mentioned, restrictive policy looks a little bit misplaced now relative to where the economy is. And there's, you know, there's certainly arguments for them to get back to neutral more quickly. Um, I think at the same time though, that you know, the Fed probably doesn't want, you know, they, they certainly send signals in what they do. The market interprets what they do. And I think they want to be a little bit careful, you know, not to, um, you know, send negative signals about the economy, uh, in, in what they're doing. So, you know, I think whatever they do, they're going to want to say, you know, we think the economy's doing fine. Um, you know, certainly things are slowing. Um, and we think it's now time to to return monetary policy to to more normal territory. I think that's the way they will try to communicate this. I think that makes sense. Um, you know, and so whether they do, um, you know, I think we think they're going to do 25, but whether they do 25 or 50, I think that's more important piece is the communication on this.

All right, 25 is taken back the higher probability as of now. And, uh, we've still got some time until that next meeting. Tiffany Wilding, who is the Pimco managing director and economist. Thanks so much for taking the time here with us today.