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A lot of the wild moves that we saw in markets this week can be attributed to recession fears after that softer than expected jobs report last Friday. Now a lot of economists and strategists and investors began forecasting that the Fed would cut rates in September and would make a bigger cut than previously anticipated. Your evidence, CME FedWatch probability tool jumping to that 50% uh basis points marker here. And though our next guest here has a different take, saying the Fed may not cut rates until November, we have Brad Case, who's the Middleburg community's chief economist, and he's also a former economist for the Federal Reserve. Brad, great to speak with you. Okay, so take us into your calculus here. No cut until November?

I think that's right. Uh first of all, there's no particular reason to cut rates right now. Uh when when we when uh data really show a softening economy, yes, then there will be a chance to cut rates. But we don't have that kind of data yet. So the people who think that the economy is head headed toward recession are guessing that things are going to soften when we just don't have any data suggesting they're softening. You mentioned before how strong consumer spending has been. And that's true, and that is because uh wages and and incomes have continued to increase. Consumers have the money to spend. And until we start to see faltering in income growth or in consumption growth, there's really no no reason to think that the economy needs lower interest rates yet.

I mean, aren't we starting to see some of that faltering though? I mean, it's cracks showing up in the rate at which wages right now are are starting to just kind of moderate. And then additionally on the categories where consumers are spending. So it feels like the pressure is is there and getting larger, especially as the economists that we've speak spoken with, uh, you know, our reference, Dana Peterson, the chief economist over at the conference board, saying that this is a a battle weary consumer at this juncture.

I I'm not seeing that. You know, the the data that we that are that are useful for making uh forecasts about macroeconomic conditions are based on surveys and you're going to have month-to-month bumps in the data. And so what you're looking for is a sustained weakness. So, for example, the last employment report was weaker than expected. We've seen that several times before, a one-month employment report that was weaker than expected, followed by other employment works reports that were not weak. And so I think uh before we start to take uh data like that as a sign of actual weakness throughout the economy, we need to see some some some sustained weakness in those in those indicators. And we need to see it across a bunch of indicators. Remember that a recession doesn't mean that one part of the economy is weak. A recession means a sustained, strong weakness throughout the economy, both geographically across the country and throughout uh many or most uh sectors of the economy. We just don't see that.

What happens if we don't get a rate cut in September, which the CME FedWatch probability, we've seen that already jump, not even just to the point where it's a 25 basis point cut, but to a 50 basis point cut.

Yeah, I I I think it's I use that tool. It's a very, very useful tool, but it is based on uh on um investment activities by people who have important reasons for hoping for um for a cut and interest rates. It's not an infallible tool. No no single rule is infallible. And so what you have to do is look at a broad range of indicators. I use 8 to 10 indicators and I look for multi multi-month uh uh trends in them. Um my uh my recession probability forecasting model has increased in probability, um but only to a 41%. So, uh so the probability of recession has increased over the probability of recession over the next year has increased, but it hasn't become become very strong. I think what's likely to happen is that between now and November, there will be enough data that suggests that they that the Fed should not continue to keep rates high and that and because of that, in November they will start to low to reduce rates. That may happen in time for the September meeting, but I don't see any sign that it will.

Okay, so let's pivot this to something that you and I talk about quite frequently, Brad, and that is housing and the housing market. What happens to the housing market if we don't see the initial cut that perhaps signals what the rest of the policy pathway could look like?

Well, if you look at uh residential construction, what we've seen over the last few months is a softening in the amount of residential construction, whether it's housing permits or starts or completions, but you have to recognize that that's coming from an elevated level. There was a demand surge in housing in 2020 and 2021, and that was caused by individual behavior, people wanting to go out and get their own uh own own housing. Um, and in response to that demand surge, there was a supply response, a very strong one, and that is tapering off. So just as when we look at the unemployment rate, you know, we see we've seen the unemployment rate go up, but it's going up from an extraordinarily low level. Just the same way in the housing market, we see starts come down and activity come down, but it's coming down from from an extraordinarily high level. So what you want in your economy is the you want the entire economy to be moderate. And so we're going from a situation where the economy was too hot to one where it is moderating to a sustainable level. And that's a good thing.

Brad, thanks so much for taking the time here with us. Appreciate you presenting this perspective. We'll have to check back in and see what takes place after September.

I will look forward to it.

Certainly. Brad Case, Middleburg community's chief economist. Thanks so much.