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Central bank officials defending last week's half point cut as necessary to sustain balance in the US economy. Investors now turning their attention towards a slew of economic prints in the weeks ahead, that could provide a look in inside at the health of the labor market. Also, maybe some clues on what the Fed is going to do next. Joining us now we want to bring in Stephanie Roth. She is Wolf Research Chief Economist. Stephanie, it's great to have you back here on Yahoo Finance. Let's talk about the 50 basis point cut. I think a lot of people are looking at this trying to figure out whether or not this was a preemptive move, whether or not we should be worried about some of that softening within the labor market. What do you think?

I mean, it was probably preemptive to some extent. At the same time, the Fed has a lot of room, right? Rates at 550 with policy estimates somewhere around at least 4%, maybe even lower for neutral. They have a lot of room to to go big at the beginning. And also, Powell didn't fully acknowledge this. He kind of danced around the the question, but they asked whether we were just catching up from the July cut that probably they should have done. And he didn't exactly say say this was the case, but I think you could read from the body language that wasn't what he was implying, that they should have cut in July, they didn't. Now they did the 50 basis point cut. And from here it's going to depend on on the labor market and and inflation, and inflation is trending back down towards that 2%. So it makes sense for them to be getting back down towards a a a a policy rate that's closer to neutral.

You know Stephanie, so interesting because as we're seeing right now, Bowman coming out saying that core inflation remains, quote, uncomfortably above that 2% target, seeing greater risk to inflation than the labor market. It doesn't sound like you necessarily agree with that sentiment.

No, I don't. And if you listen to Waller from Friday, he said kind of the opposite. He said he's worried about inflation perhaps missing to the downside. And the more recent run rate in core PCE is running below 2%. So if if you look at P core PCE, which is in fact their target, and if you don't look at a year of year basis because year of year inflation is is, you know, a little bit lagged to some extent. That's 2.6%. But if you look at a three and six month change in core PCE, you're running below 2%. So they're for now, especially with labor market starting to to sort of decelerate meaningfully, they're at risk of potentially missing to the downside. And the the SEP or the summary of economic projections, which they put out last week, indicated that risks are now uh, you know, more balanced on the inflation side and skewed to unemployment rate rising from here.

It it seems though from Bowman that there are greater risks to inflation than the labor market. Where where are some of those risks? Are we just thinking about exogenous threats that we we can't anticipate, or is there something more broadly that they see brewing right now?

Well, she might be concerned that uh wage inflation is still running a little bit high because wage inflation feeds most closely into service inflation, which is the biggest part of the inflation basket. But if you look at the more recent trend that you've seen a deceleration and employment growth, then you should expect wage growth to follow as well. You could be talking about some of the one-off factors. So, you know, Boeing strikers potentially getting a a a boost to their wage inflation or port strikes potentially disrupting activity, but those things should be temporary and the Fed should generally look through that. And at this point, the risk of having a a labor market that weakens more materially is more significant for the economy than having inflation run a bit bit high. We've we've been in an environment where inflation was was a little bit elevated and and we kind of were able to pull through that. But if we start to see the labor market really really melt down, that could be a that could be a recession risk and the Fed wants to avoid that.

So, Stephanie, what's the most important data point do you think? Deciding between 25 and 50 basis points. I'm assuming it's the labor market here from your commentary. And then I guess if that is shown true and to go a step further then what is that threshold that you think the Fed is closely watching to decide how concerned they're going to be about the health and the strength of the labor market?

So it's certainly going to be the payrolls print next Friday. So we have a week and a half to just sort of think think about uh the the estimates there. But our base case is that we're going to see um payrolls come in a little bit better than the the the market is fearing. So the the threshold that you were referring to, I would say somewhere between 100 and 230,000 on payrolls. So if we get something that's notably lower than that, that might push the Fed to to be more likely to do a 50 basis point cut. If we get something that's closer to that threshold or above, then the Fed might feel a little bit more comfortable just going 20 basis points from here. Similarly, the unemployment rate, if it rises uh certainly to 4.3, that would be some some, you know, reason to to do a 50. If it rises towards 4.4, then a 50 is is almost certain. So it kind of is going to depend on on the nuances within that print, but hands down the payroll print is going to be arguably the most important thing determining the next couple of couple of uh moves from the Fed.

At this juncture, is it too early to get a sense of what a terminal rate could look like at the end of this cutting cycle?

I mean, the Fed is telling us it's close to that 2.8. We think it should be somewhere around there as well. Um, where our base case is that they'll cut at least to 3%, um perhaps even by the end of 2025. So now that they're potentially accelerating this this cutting cycle, we could easily see 3% uh in in the not so distant future, and then maybe just a couple of cuts after that.

Stephanie, I want to take a look at what's happening around the globe and specifically China, the the stimulus measures that were announced this morning. Obviously, they're doing it in an effort to boost their struggling economy, but I'm curious what you see as the ripple effects on a global scale.

We've heard this so many times before, that China is going to be easing and there's excitement about the impact on on the global economy, and it hasn't played out. So we are we remain fairly skeptical that that any any easing moves that they do out of China will be large enough such that it will have a global implication, boosting the global economy. Base case is it it perhaps helps to stabilize their economy at the margin, helps to stabilize confidence, but that's that's kind of it. They're they're still trying to deal with their the bubbles that they have, especially in the housing side, and they don't want to really accelerate their economy meaningfully. So it's likely to be fair fairly modest and base case it doesn't have this global implication, especially from an inflation perspective.