The Fed: will it be 25 or 50?

Episode Summary

Executive Summary: The episode centers on the Federal Reserve’s looming rate decision amid a cooling US labor market. Hosts debate whether a 25bp or 50bp cut is appropriate, balancing recession risk, inflation progress, and signaling effects. They also discuss market reactions, Fed messaging, and a lighter “long/short” segment on Apple’s new AI phone features and the value of veterinarians.

Main Topics: Fed rate decision ahead of the September meeting (Priority: 5/5): The hosts frame next week’s FOMC meeting as a likely rate-cut event, with debate focused on whether the Fed should move by 25 basis points or 50 basis points. Labor market slowdown and recession fears (Priority: 5/5): They examine recent payroll and unemployment data, arguing that the labor market is clearly cooling even if one month’s data is noisy and does not prove recession. Inflation versus employment in the Fed’s dual mandate (Priority: 5/5): The conversation contrasts the view that inflation risk has eased substantially with the Fed’s caution that both inflation and jobs still matter, including John Williams’s 'equipoise' framing. Communication and signaling risk for the Fed (Priority: 4/5): A major theme is whether starting a cutting cycle with 50bp would signal panic or merely reflect confidence that inflation is won and rates can come down faster. Market reaction and expectations (Priority: 4/5): The hosts note that bond and equity markets interpreted the jobs data as increasing the odds of larger cuts, but stocks initially fell because the report also raised recession concerns. Long/short segment: AI phones and veterinary care (Priority: 2/5): In the lighter segment, Rob shorts the new iPhone’s AI features as intrusive, while Katie longs vets after a serious dog health scare and praises veterinary care despite its cost.

Key Arguments: The labor market is weakening on a multi-month basis: unemployment is rising and job creation is slowing, even if single-month payroll data is noisy. The Fed has almost certainly decided to cut rates next week; the real question is whether to cut by 25bp or 50bp. A 50bp cut would be justified if inflation is effectively defeated and real rates are still too high, allowing the Fed to protect employment and housing. A 50bp cut would also carry a strong communication signal that could be read as the Fed admitting it kept rates too high for too long or sees recession risk. A 25bp cut is safer from a messaging standpoint because it avoids triggering panic and allows the Fed to reassess after the next data releases or after the election. The August jobs report and Fed comments nudged market expectations toward a larger cut, but not enough to make it a certainty. Rob argues the inflation fight has been won, citing better inflation readings, falling commodities, and weak China-driven disinflation pressures. Katie argues the Fed should avoid overreacting to squishy labor data and instead proceed with a more cautious 25bp move. The market’s initial negative reaction to weaker jobs data shows that investors are worried about the economy, not simply cheering the prospect of faster cuts.

Data Points: August unemployment rate: 4.2% - Latest US jobs report; slightly better than July’s 4.3%, though the improvement was small at finer precision. July unemployment rate: 4.3% - The earlier reading that sparked market concern and recession worries. July non-farm payrolls (initial): 114,000 jobs - Originally reported job creation for July before revision. July non-farm payrolls (revised): 89,000 jobs - July payrolls were revised down, worsening the prior month’s labor picture. August non-farm payrolls: about 140,000 jobs - The August jobs gain was better than July’s revised number, but not strong enough to erase slowdown concerns. FedWatch probability of 50bp cut: 27% - Market-implied chance of a half-point rate cut at the upcoming Fed meeting. Stock market move after jobs report: -1.7% - Stocks fell after the weaker-than-expected labor data because it raised recession concerns.

Pivotal Quotes: "The significant progress we've seen towards our objectives of price stability and maximum employment means the risks to the two sides of our dual mandate have moved into equipoise." — John Williams: Used to explain the Fed’s shifting balance between inflation and labor-market risks. "The current batch of data no longer requires patience, it requires action." — Christopher Waller: Fed messaging after the jobs report, interpreted as leaving open the possibility of a larger cut. "I think inflation is dead." — Rob Armstrong: His argument for why the Fed can cut more aggressively and should not fear inflation as much as before.

Implications: Markets are likely to stay sensitive to each labor and inflation print ahead of the Fed decision. A 25bp cut would signal caution; a 50bp cut would suggest the Fed thinks policy is too tight and wants to reassure the economy quickly.