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Joining us now is Jim Karen, Morgan Stanley Investment Management Co-CIO of Global Balance Funds. Jim, it is good to see you. So, uh, Jay Powell delivers that supersized cut, Jim. You call it a catch-up cut. Explain that, Jim.

Yeah, hey, thank you and good afternoon. Um, look, I think that Powell wanted to go 25 basis points in July. And I think the committee voted him down and he looked back with some regret. And I think if you if you look at the way that the committee voted this time around, it feels like the committee, the FOMC committee was strong-armed by Powell into saying, look, we didn't go in July 25 basis points. We should have cut. Um, now we've got to make that up and we should have already been cutting. So therefore we have to do the 25 in September that we were going to do anyways. So that totals 50 basis points. But I think it's very important to understand is that most people at the FOMC that voted on this for 2024 agree that interest rates should be coming down. But then when you start to look out to where policy rates should be in 2025 and in 2026, what you see is that there's a large dispersion across the voting members of the FOMC as to what their policy forecast actually should be. So this has the earmarks of really the chair exerting his influence and strong-arming the committee in some ways into going to a 50 basis point cut.

What, I'm just curious, Jim, because that's a very interesting theory. Um, what brings you to that theory? Is it the dissent by Michelle Bowman, the first one that we've seen in what, some 20 years? What what leads you to that conclusion?

Yeah, so so what leads me to that conclusion effectively is the dispersion of views going out into the 2025 year and into 2026. I'm looking, I'm considering the dot plot at the moment. So for 2024, the whole question, Fed policy at 5 and a half percent was restrictive. And it's very likely that it needs 100 basis points needs to come off that right away. So for 2024, which is exactly what the Fed's forecast is, is that they want to bring the policy rate by end of 2024 down towards about 4 point, as they would say 4.4%. So 100 basis points right off the top, I I think should start to come out. But then when you start to think about this going out into 25 and into 26, the opinions start to vary quite a bit. So, um, it doesn't seem like there is this unanimous view that we need to go, that the Fed needs to go so aggressively, but they do believe that rates are too high, probably by at least 100 basis points, and then after that we should go slowly. Because remember what the Fed is now forecasting is that they're going to cut rates 25 basis points per quarter in 2025 and they're going to go 100 basis points between now, well, yesterday and and and in the end of of the year.

You know, you you were surprised, Jim, they they went 50 so was I. A lot of people were, they were expecting 25. What are the the risks of doing a half point cut?

So so so the risks are two-sided, right? So so the first risk that I'll say is that is that if they go too aggressively too quickly, they could potentially reignite some of the inflation fears, inflation concerns, and if inflation becomes unanchored, that will prevent them from hiking rates, sorry, cutting rates, I apologize, cutting rates as much as they'd like to cut in in the future. But on the other side of this is if they didn't cut rates aggressively, then it could be that the unemployment rate starts to accelerate higher and then they have a much deeper downturn in the future, and then they have to be more aggressive in terms of their rate rate cuts later. So the risks are are are two-fold, right? So this put them in a really difficult position. Do you go quickly now and have the risk of inflation, or do you go too slowly at this point and have the risk of a deeper downturn? And they they elected to say, look, we would rather ensure against a deeper downturn because we believe that inflation pressures are are stable at this point. So therefore we can afford to be more aggressive and start more aggressively and buy that insurance policy.

Jim, what does all this mean for the markets? I mean, today it means risk on almost everything, right? Um, do you think that that is sustained not just through the coming days, but as we continue through this cycle?

Well, if we look at the data, right? So so so we have the Atlanta Fed GDP now forecast somewhere around 3%. We have the employment situation. We had jobless claims today, you know, it was relatively, you know, a good number, a strong number for the labor market. The labor markets have been, you know, printing a little bit better and showing some signs of at least stability. So you have a Fed that with a 3% growth rate in the third quarter, the jobs markets still today at least for right now in relatively good shape. We had decent retail sales, we had slightly higher PPI and CPI, and they elect to cut 50 basis points. So what they're basically saying is that going into the future, if we look at equity markets, that they're saying that future earnings, if we go into 2025, that those earnings are likely to be more valuable to investors, meaning that when they think about 2025 full year earnings, the consensus is around $280. What multiple would an investor pay on that $280 consensus view? And the answer is coming back that's somewhere around 20 or or 21, which when you put those two things together suggests an S&P 500 of closer to 5800, even 5900. So or even possibly slightly higher than that. I'm not saying that that's the forecast, that's my view. All I'm saying is that that upside tail risk, I'm going to call it an upside tail risk, becomes much, much more likely than, you know, than then what we saw before prior to the Fed cutting 50 basis points.