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Veronica, thank you so much for being here with us this morning. Just starting on this PMI data that's just crossing now. Anything that you want to raise an eyebrow at?

Yeah, I I I don't think we can learn too much new from from this data. The the services measure has been remarkably steady for the last, you know, four or five months or so. Um some of the details there are a bit more interesting though. The employment sub component that's still below 50, that's still in contractionary territory. Um and of course, it's really employment data that matters here first and foremost right now. Um manufacturing, you know, that definitely was weaker than expected. It does seem like manufacturing activity is is really pulling back. Of course, we saw job losses in that sector in in August, so that does seem to be slowing more dramatically.

Veronica, what's your base case at this point after the Fed cut by 50 basis points? What are you expecting between now and year end? And how are you factoring in that risk of recession?

Yeah, I mean, I think that risk is is still pretty elevated. It really just comes down to the trends that we're seeing in in the labor market. Um we do think this is a a genuine weakening of the labor market, and we can see that more in data that we're going to get next Friday. Um we'll have another jobs report before we get to that November decision also, but I think both of those you should show this weakening trend continuing and the Fed is cutting 50 basis points again in November in our our base case. Um maybe then slowing, you know, back to 25s thereafter. Um but the risk is that, you know, they would be front loading even more of this.

I'm interested in that because in your note, you talked about how your base cases for 50 at the next meeting, but they could potentially go even larger. How bad would the labor market data have to be to get 75 basis points of cuts come November?

Yeah, I think if we, you know, do see evidence of this more sharp weakening, um which is this is kind of the point in in historical cycles when you would start to see that. Um the bar is probably pretty low to to front load even more of these cuts. You know, by most measures of, you know, an estimated neutral rate, where we're still very far from that right now, even after 50 basis points last week. Um so you do want to get, you know, more quickly back to neutral, not getting to neutral many months from now.

Veronica, is there any reason to be concerned that maybe the Fed is getting a little too aggressive if they were to cut by an additional 75 basis points between now and year end? Of course, that raises a risk that maybe we could actually see inflationary pressures return here to the upside. Are you, how closely are you watching that, or why are you then not concerned maybe about that risk?

Yeah, I mean, of of course it's it's important to watch. Um where you would expect to see any, you know, re-emerging signs of inflationary pressures first would be in something like the housing market. If we see, you know, home prices picking up or rents picking up. Um we don't have, you know, great timely data on that yet, but we do have, you know, data on weekly mortgage applications that are being filed for for home purchases. And of course, we have seen mortgage rates coming down, but those mortgage applications still look very low. Um I think what could be happening is that the labor market is weakening, and that's going to offset any boost you would get from from lower rates in that sector. Um so definitely watching it of course, but the next, you know, six to nine months to a year, the inflationary, you know, pressures look pretty muted, at least for for now.

Yeah, Veronica, I'm I'm glad that you bring up home pricing, because I was looking at some data this morning. The home price to median household income ratio, now landing at 7.2 times. That is a new all-time high. Could the housing market end up being the Fed's Achilles' heel?

Yeah, I mean, I do think, you know, you could see some re-emerging inflation risk there, not not necessarily in the very near term, but you know, maybe a year or two down the line. Um it is something something to watch, of course. You know, we are maybe structurally short housing still. Um so that could be a re-emerging source of inflationary pressure. But in the next, you know, year or so, nine months, I think the, you know, overwhelming issue is going to be a weakening labor market.

All right, Veronica Clark, always great to have you to talk to. Thank you so much for joining us here this morning as economist with the city.