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Now, Wall Street is bracing for a very anticipated Fed meeting, one of the most anticipated in recent memory. Both a quarter point and a half-point rate cut are still on the table. Joining us now to discuss, we've got Bill Adams, Comerica Bank's Chief Economist. Bill, it's great to speak with you. So, listen, I'm fascinated in the degree to which the market has repriced around a 50 basis point cut. I certainly didn't get the sense from Powell that that was going to be possible in his Jackson Hole remarks. Do you think the market is going to end up disappointed and potentially a bit offsides today if we do just get a standard 25 basis point cut? What's your base case?

Hi Madison, and thank you for having me on. I think, uh, I see a 25 basis point cut as a bit more likely than a 50 basis point cut, honestly. Uh, the economy is in a pretty good place. Uh, economic growth is holding up in the third quarter. We had that really nice retail sales report, the nice industrial production report out earlier this week. Uh, and so I don't think there's a lot of urgency from the Fed's perspective to support the overall economic growth. Uh, the Fed has seen the labor market loosen. And um, I think that is supporting the rationale for a bit more support to the uh, to the economic expansion. But uh, I think whether it's 50 basis points or 25 basis points, as long as the Fed signals that uh, they expect to make substantial further cuts into 2025, I think that will provide the reassurance that um, uh, financial markets and the economy more broadly needs, that those interest rate sensitive sectors can rebound next year.

Does even the expectation of or perhaps a high hope of a 50 basis point cut by some out there, and as we're continuing to monitor the probability, with that still being part of the thought process at this juncture, does that just signal to you that some of the recession fears out there might be overdone?

I don't think it's likely that we're in a recession. I don't see a recession around the corner. Um, now the, the big recession indicator that I and many others have been watching in the last two months is the Sahm indicator, where we have seen a substantial uptick in the unemployment rate over the last year. Uh, and historically, when the unemployment rate's risen as much as it has, the economy has been in recession. But this time, you know, knock on wood, seems different because uh, we're seeing very rapid labor force growth in 2024, partially because of immigration and partially because labor force participation uh, is rising uh, among people between ages 25 and 54. It's the highest since early, you know, the early 2000s. Uh, and when you see an economy that's rapidly adding workers and job seekers, you can have the unemployment moving up uh, despite adding jobs. So jobs are growing, but they're not growing fast enough to keep up with growth of the workforce, and I think that is uh, supporting those expectations for potentially a larger cut.

So to what extent are there factors that are outside of the Fed's control that will not be reactive to rate cuts?

Fiscal policy is the big one out there right now. Fiscal policy has been very expansionary over the last two years. Uh, been a bit less expansionary in 2024. We saw a big increase in income tax receipts from the government and corporate tax receipts from the government this April. Um, and that's partially reflecting the good news that the stock market did really well in 2023, so there were higher capital gains due uh, from, from taxpayers this tax season. Uh, but uh, expansionary fiscal policy means that there's less pressure on the Fed uh, to have expansionary monetary policy or less restrictive monetary policy. That's one of the reasons why Comerica forecasts that the Fed is going to cut by, I guess, only a quarter percent this meeting. You know, even this quote-unquote only, it, it still, uh, we're still on course for substantially more loosening of monetary policy over the next 12 months than seemed likely, uh, you know, at mid-year, uh, much less in April after we saw an uptick in inflation in January and February. So I think the big picture is still that monetary policy looks set to loosen uh, substantially, and that's going to support economic growth.

Given that, I'm curious from your perspective, do you think that the dot plot or any indication about the Fed's path forward to that neutral rate is potentially going to matter more today than whether or not we get 25 or 50?

I think forward guidance is going to matter more than the immediate decision. The funny thing about the dot plot is that it's, you know, it's all the members of the Federal Open Market Committee, and not every dot gets a vote every meeting. Um, there, there's, uh, the FOMC, uh, presidents of the regional Fed branches, uh, they have rotating votes, and they tend to be more hawkish than the Fed governors in Washington. And so every time I read the dot plot, you know, that's, it's sort of like an opinion poll of all American adults versus people who voted in the last election. You know, it tells you a different message about what people want, how people think they should vote versus how they're actually going to vote and what the actual vote on monetary policy will be. So I think actual policy is going to probably end up more dovish than what we see in the dot plot. Um, and I will watch for Chair Powell's comments for kind of a more specific guidance there.

And since you had previously mentioned fiscal policy, I do want to ask you about the upcoming election. There is a chance that come that November meeting for the Fed, they don't know who won the presidential election, and they can't therefore kind of price in the potential impact of fiscal policy to come when it comes to inflation. To what extent do you think then that they might want to go 50 today to get ahead of any unknowns regarding the presidential election in that November vote?

You know, I expect the Fed to make the November decision based on what's going on with inflation and labor indicators, and probably to not have the election factor into that decision. Um, and I've been reminding Comerica's clients uh, for the last couple of months, and we're, we're still talking about it, that fiscal policy depends as much or more on what happens in Congress and the Senate. Um, Congress and the Senate have to vote on fiscal policy, have to have to pass the fiscal policy. So the presidential election is what's, you know, eating up all the bandwidth, but what happens in the legislative branch is really going to determine what happens with fiscal policy.

Bill Adams, Comerica Bank Chief Economist, Bill, great to get some insights and perspective ahead of this big decision, just hours away from it. Thanks so much.

Thanks for having me.