Yahoo Finance

For more on the current state of the economy and what's next for the Federal Reserve, let's welcome in Thomas Simons, Jeffries Chief US economist. Thomas, it's always great to see you. Obviously, you know, big news today from the markets perspective. I'm curious how you're interpreting it from an economic perspective. It seems like the balance of risks in terms of the economists we've been speaking to has seemed to be more weighted to worrying about the growth side of the equation than a sort of more permanent inflation side of the equation. Has that been your concern? And is now that gone, alleviated? Where are you?

Yeah, I think that looking at it in terms of the balance of risk is really all that we can we can do at this point. Uh, trying to put precise, you know, pinpoint forecast on different data points has been virtually impossible for the last two months. And the news over the weekend while encouraging hasn't made that process any easier. So I think we were always kind of on the more sanguine end of the growth uh forecast range. Uh, you know, we had thought that we would see slowing and growth but no outright recession. Um, I do think that this takes the potential downside risks, uh, you know, tones them down quite a bit, especially as it relates to the the labor market. I could see businesses perhaps uh being a little bit more patient on, uh, you know, perhaps delaying layoffs or reducing scale or just, you know, kind of taking a breath before they make a big decision. Um, and so long as the labor market holds up well, I think that we can be confident the consumer can continue to, uh, you know, push, continue to support solid pace of growth.

So it's interesting, Thomas, because we've certainly seen the soft data take a hit, right? And so the the question has been, okay, when is that going to translate that that into the hard data? When would you expect that, Thomas? Do you expect that?

I don't think it's reasonable to be, uh, you know, kind of directly translating some of the declines we've seen in some of the, you know, for instance, consumer confidence data into significant declines in uh in spending. Uh, there is a wonderful report that the the Fed Board of Governors put out a couple weeks ago now, uh, that really dug deep into sort of, do consumers do what they say or or not. And really it broke down to, if you were a consumer that felt like your income did not keep up with inflation, then you felt quite terrible about it. Uh, but they tied together actual spending data from those same consumers and showed that they continue to spend. Uh, so as long as people think that their incomes are not going to be, uh, you know, outpaced by inflation and, you know, potentially now we have lower tariff scenario playing into that expectation. I think that it'll probably translate into a little bit better consumer confidence and they keep on spending. So I don't think that that's necessarily going to show up in the in the hard data. Unless we do end up with that sort of empty shelves scenario. Again, I don't think that that's uh particularly likely for the baseline, but if people run out of things to buy, then surely we'll have a contraction spending out of what we had, like in 2020, for instance.

And Tom, what about, um, what this means for the Fed and where are you expecting them to go and how much that calculus maybe changes?

Yeah, it seems like we kind of flipped the coin all the way to the other side here where there was this concern that uh higher inflation or higher price levels from tariffs was going to handcuff the Fed and keep them from uh from cutting. But now all of a sudden, we're we're looking at, uh, you know, complete reversal where, uh, we have potentially stronger growth but it's going to drive higher inflation and thus keep the Fed from cutting. Uh, I think if we do end up in that scenario, that's a good problem to have. That's one where the Fed can probably maintain rates at this level for quite some time, perhaps even consider, uh, raising rates again. But that would be, you know, much further down the road. Uh, once we're through a lot of this other uncertainty on fiscal policy and deregulation and once we are, you know, concretely in a higher growth environment, then that would be a conversation for a different day. But at this point, I think that their patient approach has been totally it's totally paid off, you know, and I think that they can continue to do that for a little while longer here, uh, before potentially making a mistake by going too early.