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Welcome back to Morning Brief, brought to you by Invesco. We heard from Fed chair, J. Powell, last week. The time for interest rate cuts has come. More than 70% of investors are now pricing in a 25 basis point rate cut in September, but the size of that relief still remains an open question here to weigh in. We've got Ryan Wang, who is the chief US economist over at HSBC. Ryan, what camp are you in? 25, 50? What would you like to see? What's the real reality?

Thanks so much for having me. Look, I think as we've gotten some more economic news over the past several weeks, I think that 25 basis point rate cut at the September policy meeting is looking more and more likely. Certainly we did hear very clearly from Fed chair, Jerome Powell, that the time to act is basically upon us. I think there's still some question about what the size of that initial move should look like. But given the overall comments on the state of the labor market, yes, labor market conditions are cooling, but we don't necessarily see an elevated rate of layoffs. I think we're more likely to see that a more incremental start to the rate cutting cycle with that 25 basis point reduction.

What's going to drive the difference between 25 and 50 cuts at the next meeting?

Well, look, I would answer this in two ways. I think in the back of the minds of FMC policymakers, they do want to have a sense of where they might be headed before making that decision about pace, right? I think that's really what it comes down to, timing. How quickly you want to move policy into a stance that might be considered neutral, or less restrictive on the overall economy? And you have to be forward-looking in a sense. But at the same time, if we don't really see that loss of business confidence that would be signaled from a spike in layoffs, if instead all we're really seeing is a less frantic pace of hiring, which is how Powell put it, then I think you have a little bit more time to be cautious to move incrementally. You might still have in mind a destination, but I think there's less urgency to move that way in a very fast fashion.

I mean, we've heard more acknowledgement as well, or at least submission to the idea that it's not wages specifically that are continuing to drive inflation. So what is it? What is the larger, more outsized part of the mix that is still accounting for the most rises in prices that we're seeing?

Well, I think that's right. I think this is why the labor market data have been so important because they, in a way, have a double implication. Firstly, it's just one half of the Fed's dual mandate. So when they see signs that the unemployment rate is rising, that labor market conditions are less tight, Powell talked about the decline in hiring rates and quit rates below their pre-pandemic levels back in 2018 and 2019. That's something to think about in and of itself. But also I believe it's changed how the Fed is thinking about the balance of risks with respect to inflation. Now, if you look at the actual current data on inflation, you still do see elevated rates of services inflation. I think it does reflect the kind of, what we've seen out of the labor market in the past two years, which admittedly has still been pretty tight. But, you know, also when you look at what businesses are saying anecdotally, comments about labor shortages are becoming narrower. There are still pockets of labor shortage, but in some cases, these might be structural shortages, you know, particularly in skilled trades, where businesses may not even have an expectation that they're going to be filling their open positions. So when you look at all the data, I would say that it's those signals the Fed is paying the most attention to, and that's why that, on the margin, they've become a little bit less focused on upside risks to inflation.