Welcome to the Fear and Greed Business Interview. I'm sure, Aylmer. It's been a very big twenty four hours the global economy. First, the US Federal Reserve cut its key interest rate by half a percentage point. Markets had been expecting a rate cut, but fifty basis points was certainly at the larger end of expectations. Then back home, the labor force numbers for August saw the number of people with jobs increased by forty seven five hundred, well above expectations, and all of this coming just before the Reserve Bank Board meets next week. Diana Messina is IMP's deputy chief economist. Deana Welcome back to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm sure, Aylmer. It's been a very big twenty four hours the global economy. First, the US Federal Reserve cut its key interest rate by half a percentage point. Markets had been expecting a rate cut, but fifty basis points was certainly at the larger end of expectations. Then back home, the labor force numbers for August saw the number of people with jobs increased by forty seven five hundred, well above expectations, and all of this coming just before the Reserve Bank Board meets next week. Diana Messina is IMP's deputy chief economist. Deana Welcome back to Fear and Greed.

Hey, Sean, nice to be back.

Hey, Sean, nice to be back.

So let's start with the US fifty basis points. What's that telling us about the US economy.

So let's start with the US fifty basis points. What's that telling us about the US economy.

Well, Powell was very sort of clear that he didn't want people to think that it was an emergency rate cut, that fifty basis points was not going to be the norm going forward in the meetings, that this was basically what he called recalibration of the Fed's policy. So he again reiterated that the Fed was not behind the curve. They didn't think that they had to cut rates sooner. It was more that they're trying to get interest rates back to neutral. Most of the members agreed to the fifty bas point cuts, at least they did in the meeting. You know, they would have had a discussion beforehand, except for one member thought that it was best to cut by twenty five based points. So I think basically the Fed is just indicating that the balance of risks are now towards with a weaker labor market in particular, maybe a weaker economy, although the data in the past week certainly doesn't suggest that the US economy is softening that much and that the risks towards higher inflation have completely dissipated because the Feds aren't. Forecasts for inflation actually stepped down from three months ago.

Well, Powell was very sort of clear that he didn't want people to think that it was an emergency rate cut, that fifty basis points was not going to be the norm going forward in the meetings, that this was basically what he called recalibration of the Fed's policy. So he again reiterated that the Fed was not behind the curve. They didn't think that they had to cut rates sooner. It was more that they're trying to get interest rates back to neutral. Most of the members agreed to the fifty bas point cuts, at least they did in the meeting. You know, they would have had a discussion beforehand, except for one member thought that it was best to cut by twenty five based points. So I think basically the Fed is just indicating that the balance of risks are now towards with a weaker labor market in particular, maybe a weaker economy, although the data in the past week certainly doesn't suggest that the US economy is softening that much and that the risks towards higher inflation have completely dissipated because the Feds aren't. Forecasts for inflation actually stepped down from three months ago.

Okay. Jerom Powell, the chair of the Federal Reserve, made it pretty clear that this won't be a one off cut. They didn't he there will be more.

Okay. Jerom Powell, the chair of the Federal Reserve, made it pretty clear that this won't be a one off cut. They didn't he there will be more.

So when you look at the Fed's own projections of interest rates, that doesn't mean that that's what will happen to policy, but the Fed members all indicate where they think interest rates will go. That's otherwise known as the dot plot, that median dot is indicating two more rate cuts before the end of this year, two more twenty five basis point rate cuts before the end of this year. So another rate cut at each of the next two meetings before Christmas, and the market is pricing about thirty five basis points of rate cuts, so another fifty from here and then a twenty five and then basically one rate cut every quarter next year. So we get the cash rate, or the FED funds rate I should say, to about three point four percent by the end of twenty twenty five. So pretty I guess it's not a significantly easy cutting cycle. I'd say it's quite modest, just taking interest rates back to where the Fed sees neutral to be, which it indicates is somewhere at around three percent.

So when you look at the Fed's own projections of interest rates, that doesn't mean that that's what will happen to policy, but the Fed members all indicate where they think interest rates will go. That's otherwise known as the dot plot, that median dot is indicating two more rate cuts before the end of this year, two more twenty five basis point rate cuts before the end of this year. So another rate cut at each of the next two meetings before Christmas, and the market is pricing about thirty five basis points of rate cuts, so another fifty from here and then a twenty five and then basically one rate cut every quarter next year. So we get the cash rate, or the FED funds rate I should say, to about three point four percent by the end of twenty twenty five. So pretty I guess it's not a significantly easy cutting cycle. I'd say it's quite modest, just taking interest rates back to where the Fed sees neutral to be, which it indicates is somewhere at around three percent.

Okay, notwithstanding everything you've just said, there are still fears though that the US economy will go into recession. And I know Jerome Powell made it very clear that you know, it's no penic stations here, it's just the recalibration. But there is a chance that the US will go into recession, isn't there?

Okay, notwithstanding everything you've just said, there are still fears though that the US economy will go into recession. And I know Jerome Powell made it very clear that you know, it's no penic stations here, it's just the recalibration. But there is a chance that the US will go into recession, isn't there?

Well, there's always some chance, I suppose where where is that balance of probabilities right now. I mean, even in any sort of normal cycle, you'd say that the chance of recession has to be somewhere at somewhere like ten percent. I think a five to ten percent just based on a normal economic cycle, particularly for a country like the US, which has experienced more recession than compared to somewhere like Australia, where we didn't have a recession for thirty years until the pandemic, and even then that wasn't really a true recession. I'd say, so the probability of a US recession is probably somewhere between forty and fifty percent in the next twelve months. I suppose the issues though, were that the leading indicators, so things like the US Leading Index, things like the two year minus atten your bond yield, or the two year and the Fed funds rate interest rate, they're all pointing to a much softer economy than the high data indicate. So the hard data, the GDP figures, industrial production, retail volumes, business investment, those are still all holding up quite well. And then, of course the balancing factor is the labor market, which sort of is meant to give you the best guide as to the picture of the consumer. And usually historically, when the unemployment rate goes up in the US, it goes up a lot. And it's gone up so far by about zero point eight percentage points, not really that much compared to its normal historical increase in a cycle where the economy is softening, so the expectations at the unemployment rate could go much higher, although the FED the Fed's forecasts indicate that they think this time is different. They only they think the unemployment rate will get to about four point four percent, so not really too much further from its current level in their mind, I suppose the unemployment rate is not going to surge like it has in the past.

Well, there's always some chance, I suppose where where is that balance of probabilities right now. I mean, even in any sort of normal cycle, you'd say that the chance of recession has to be somewhere at somewhere like ten percent. I think a five to ten percent just based on a normal economic cycle, particularly for a country like the US, which has experienced more recession than compared to somewhere like Australia, where we didn't have a recession for thirty years until the pandemic, and even then that wasn't really a true recession. I'd say, so the probability of a US recession is probably somewhere between forty and fifty percent in the next twelve months. I suppose the issues though, were that the leading indicators, so things like the US Leading Index, things like the two year minus atten your bond yield, or the two year and the Fed funds rate interest rate, they're all pointing to a much softer economy than the high data indicate. So the hard data, the GDP figures, industrial production, retail volumes, business investment, those are still all holding up quite well. And then, of course the balancing factor is the labor market, which sort of is meant to give you the best guide as to the picture of the consumer. And usually historically, when the unemployment rate goes up in the US, it goes up a lot. And it's gone up so far by about zero point eight percentage points, not really that much compared to its normal historical increase in a cycle where the economy is softening, so the expectations at the unemployment rate could go much higher, although the FED the Fed's forecasts indicate that they think this time is different. They only they think the unemployment rate will get to about four point four percent, so not really too much further from its current level in their mind, I suppose the unemployment rate is not going to surge like it has in the past.

Stay with me, Diana, we'll be back in a minute. I'm speaking to IMP Deputy Chief Economist Dianamusina. We had the labor force statistics from the Bureau of Statistics yesterday. What did you make of the four point two percent and all those new jobs.

Stay with me, Diana, we'll be back in a minute. I'm speaking to IMP Deputy Chief Economist Dianamusina. We had the labor force statistics from the Bureau of Statistics yesterday. What did you make of the four point two percent and all those new jobs.

I think it's more of the same for the labor market. Really, we've seen this quite strong pace of employment growth in Australia in the past six months. A part of the strong employment growth is basically that we have a lot of supply going into the labor force every month. So the working age population is increasing by somewhere fifty to sixty thousand people every single month because of the high levels of immigration flowing into Australia. But a lot of those jobs, and most of those jobs are actually matched to employment, which you can see through the unemployment rate. The unemployment rate in Australia bottom to three and a half percent in twenty twenty two, has gone up to four point two percent, so in line actually with the US economy. But a four point two percent unemployment rate for Australia is pretty low. Before the pandemic, aaron ployment rate was tracking it over five percent and it was sort of hard to get it below five percent. So this is why the Reserve Bank still thinks that the labor market is not tight, but it's not loose either, and it's still probably running somewhere around those tight levels. Capacity utilization is still high. The leading indicators have softened in line with hours work, but we're not seeing that flow through to the labor market. And I think it's still quite clear the labor market's going to soften from here based on those leading indicators. But the Reserve Bank thinks it's not really going to soften that much, Okay.

I think it's more of the same for the labor market. Really, we've seen this quite strong pace of employment growth in Australia in the past six months. A part of the strong employment growth is basically that we have a lot of supply going into the labor force every month. So the working age population is increasing by somewhere fifty to sixty thousand people every single month because of the high levels of immigration flowing into Australia. But a lot of those jobs, and most of those jobs are actually matched to employment, which you can see through the unemployment rate. The unemployment rate in Australia bottom to three and a half percent in twenty twenty two, has gone up to four point two percent, so in line actually with the US economy. But a four point two percent unemployment rate for Australia is pretty low. Before the pandemic, aaron ployment rate was tracking it over five percent and it was sort of hard to get it below five percent. So this is why the Reserve Bank still thinks that the labor market is not tight, but it's not loose either, and it's still probably running somewhere around those tight levels. Capacity utilization is still high. The leading indicators have softened in line with hours work, but we're not seeing that flow through to the labor market. And I think it's still quite clear the labor market's going to soften from here based on those leading indicators. But the Reserve Bank thinks it's not really going to soften that much, Okay.

And so when you're talking about the labor market being tied, that basically means that there are still inflationary pressures flowing from the labor market, and that makes it hard for the Reserve Bank to cut interest rates.

And so when you're talking about the labor market being tied, that basically means that there are still inflationary pressures flowing from the labor market, and that makes it hard for the Reserve Bank to cut interest rates.

Yeah, Basically, when the lab market is tight, it's another way of saying that demand for jobs is still exceeding the supply of jobs. And you can still see that in the job Baconcy's figure. So when you just plot six jobs demand which is employment and job vacancy's MNUS, A supply of jobs which is the working age population and those who are in the labor force, so employed or unemployed in the laborforce, jobs demand is still outstripping that supply until you get to a point where those two come into equilibrium, or supply starts to exceed demand, which is what's happening in the US. Now, that's when you really start to see a weakening in the labor market. We're just not at that point yet. It may take a while to get to that point. We may actually not get to that point in the cycle. We may see the labor market remain in pretty good shape at AMP. We think the unemployment rate is going to head a bit higher at about four and a half percent. But you know, even at four and a half percent, that's not a significant weakening in the labor market. I'd say that would be considered a soft landing.

Yeah, Basically, when the lab market is tight, it's another way of saying that demand for jobs is still exceeding the supply of jobs. And you can still see that in the job Baconcy's figure. So when you just plot six jobs demand which is employment and job vacancy's MNUS, A supply of jobs which is the working age population and those who are in the labor force, so employed or unemployed in the laborforce, jobs demand is still outstripping that supply until you get to a point where those two come into equilibrium, or supply starts to exceed demand, which is what's happening in the US. Now, that's when you really start to see a weakening in the labor market. We're just not at that point yet. It may take a while to get to that point. We may actually not get to that point in the cycle. We may see the labor market remain in pretty good shape at AMP. We think the unemployment rate is going to head a bit higher at about four and a half percent. But you know, even at four and a half percent, that's not a significant weakening in the labor market. I'd say that would be considered a soft landing.

What are the risks of a hard landing? What are the risks of actually things going south?

What are the risks of a hard landing? What are the risks of actually things going south?

I think that there are definitely risks of hard landing in Australia or US as well globally, And I'd say that in Australia for me, would have to be if Mountrey policy stays tighter for longer, so say, the labor market remains in this quite solid position and we don't see rate cuts come through until you know, mid next year, maybe even later, or if inflation remains quite high, so the Reserve Bank feels like it has to keep interest rates a bit higher for longer than we could see the labor market unraveling a bit faster. And that's probably you know, that's like a forty percent risk, i'd say in Australia or so.

I think that there are definitely risks of hard landing in Australia or US as well globally, And I'd say that in Australia for me, would have to be if Mountrey policy stays tighter for longer, so say, the labor market remains in this quite solid position and we don't see rate cuts come through until you know, mid next year, maybe even later, or if inflation remains quite high, so the Reserve Bank feels like it has to keep interest rates a bit higher for longer than we could see the labor market unraveling a bit faster. And that's probably you know, that's like a forty percent risk, i'd say in Australia or so.

Okay, So what's it all mean for interest rates? We've seen the US FED cut, but we don't think it's going to happen. Well, Michelle Bullock, there was a bank governor said it's not going to happen this year. Notwithstanding financial markets are priced in the cut this year, and some people I suspect you might be one of them, wouldn't be surprised if there was a cut this year.

Okay, So what's it all mean for interest rates? We've seen the US FED cut, but we don't think it's going to happen. Well, Michelle Bullock, there was a bank governor said it's not going to happen this year. Notwithstanding financial markets are priced in the cut this year, and some people I suspect you might be one of them, wouldn't be surprised if there was a cut this year.

I wouldn't be surprised by an interest rate cut in Australia only because I think that the data is going to weaken up until Christmas and into next year, to particularly the labor market data. But I think it is quite hard to see the Reserve Bank cutting rates before the end of this year, just because I don't think that inflation's going to slow enough of their liking on the core numbers. We're going to see good headline outcome, but we know that those are influenced by some of the subsidies and rebates that are going on, so we really need to look at core inflation from here. It's hard to see the unemployment rate increasing towards five percent before the end of this year. We're already at September and the growth numbers, while they're weak, you know, we're clearly not in recessionary territory and around the balance of risks for the consumer. We're still seeing low mortgage areas, low areas in other parts of the market, like in cars or in personal credit cards. It just doesn't seem to be a push for the Reserve Bank to cut rates right now. I think by the time we get to early next year, though, we will see further softening in core inflation, further weakening the labor market, which will allow easier monetary policy. But of course there is bank does not have to follow what the Fed does. Here. I think a lot of people are getting a bit excited thinking we're going to get some rate cuts in Australia. Maybe we'll get a fifty base point cut from the Reserve Bank. But it's not the case. We have seen periods of time before in twenty fifteen during the GFC, when the FED was going one way with interest rate's, Australia was going the other way. The RBA has to calibrate policy for the Australian economy. The US is doing its own thing. We don't need to copy the US. I think we will have an easy cycle next year, but we're probably not there yet.

I wouldn't be surprised by an interest rate cut in Australia only because I think that the data is going to weaken up until Christmas and into next year, to particularly the labor market data. But I think it is quite hard to see the Reserve Bank cutting rates before the end of this year, just because I don't think that inflation's going to slow enough of their liking on the core numbers. We're going to see good headline outcome, but we know that those are influenced by some of the subsidies and rebates that are going on, so we really need to look at core inflation from here. It's hard to see the unemployment rate increasing towards five percent before the end of this year. We're already at September and the growth numbers, while they're weak, you know, we're clearly not in recessionary territory and around the balance of risks for the consumer. We're still seeing low mortgage areas, low areas in other parts of the market, like in cars or in personal credit cards. It just doesn't seem to be a push for the Reserve Bank to cut rates right now. I think by the time we get to early next year, though, we will see further softening in core inflation, further weakening the labor market, which will allow easier monetary policy. But of course there is bank does not have to follow what the Fed does. Here. I think a lot of people are getting a bit excited thinking we're going to get some rate cuts in Australia. Maybe we'll get a fifty base point cut from the Reserve Bank. But it's not the case. We have seen periods of time before in twenty fifteen during the GFC, when the FED was going one way with interest rate's, Australia was going the other way. The RBA has to calibrate policy for the Australian economy. The US is doing its own thing. We don't need to copy the US. I think we will have an easy cycle next year, but we're probably not there yet.

Diana, Thank you for talking to fear and Greed. Thanks Jwan it was a pleasure that was Diana Messina, Deputy chief Economist at AMP. This is a Fear and Greed business interview. Join us every morning for the full episode of Fear and Greed. Damie Business Years for people who make their own decisions. I'm Sean Aylmer. Enjoy your day.

Diana, Thank you for talking to fear and Greed. Thanks Jwan it was a pleasure that was Diana Messina, Deputy chief Economist at AMP. This is a Fear and Greed business interview. Join us every morning for the full episode of Fear and Greed. Damie Business Years for people who make their own decisions. I'm Sean Aylmer. Enjoy your day.