2 things the Fed needs to address as it eases rates: Economist

EY chief economist Greg Daco joins Catalysts to discuss what investors will be looking to hear from the Federal Reserve as it kicks off its rate-easing cycle. Daco wants to see two areas addressed by the Fed as it communicates its outlook for further interest rate cuts. First, he would like to see a "robust forward-looking framework" for cuts rather than the " .

" He argues, "We're at a point where the Fed needs to look ahead to the potential risks for the US economy. We have an economy that is still growing at a decent pace, but is undeniably slowing. Labor market momentum, income growth, they're both key indicators that are pointing to a slowdown in economic activity.



That is what the Fed needs to focus on." Secondly, he would like to see the Fed have "much better communication as to the direction of travel." He believes that there needs to be a clearer trajectory of the Fed's cuts, especially as the dot plot leans between 75 and 100 basis points by the end of the year.

For more expert insight and the latest market action, click to watch this full episode of Catalysts. Video Transcript So then what are you hoping to hear this week? That would be very clear communication to you outside of we're no longer data point dependent. And here's a strong central thesis for us which is of course not going to happen.

What would you hope to hear? I want to see two things I want to see. First that we have a robust forward looking framework, not a data point dependent or data dependent framework that is backward looking. We're at a point where the FED needs to look ahead to the potential risks for the US economy.

We have an economy that is still growing at a decent pace but is undeniably slowing labor market, momentum, income growth. They are both key indicators that are pointing to a slowdown in economic activity, that is what the FED needs to focus on. So a forward looking framework and two much better communication as to the direction of travel, we're going to see a lot of confusion around the FOMC meeting because there will be a decision 25 basis points or 50 basis points.

But there's also going to be communication around the trajectory of the fed with a dot plot showing either 75 basis points of easing before you erin 100 basis points. How do you clarify the direction of travel, the journey to a neutral monetary policy? You know, Greg, more specifically, I guess when, when it comes to the labor market, some of the weakness that we're seeing here, obviously, there's arguing, there's arguments happening on both sides of it saying that it's actually not that bad when you take into account labor supply and yada yada yada, the list goes on. I'm curious what you, what your assessment is right now of the jobs market.

And maybe whether or not the fact that we haven't seen these mass layoffs, which obviously has uh typically happened uh prior or during a recession, maybe what that signals about the strength and underlying strength of the economy, maybe why we shouldn't be too worried? I don't think we should panic, right? Because what we're seeing is a gradual slowdown in the labor market. And at ey, we speak with a lot of CEO S CFO S that are telling us the following, they're telling us that the labor market conditions are quite expensive, but the value of talent is also much greater. So they're not proceeding with massive layoffs across the board across sectors.

What instead we're seeing is a very strategic approach, limiting hiring to the needs that you have and ensuring that you maintain the right workforce. Why to drive stronger productivity growth? Because longer tenured employees are better trained and tend to be more efficient in their job. And that I think is why we're seeing stronger productivity growth, which is the key element that very few people are talking about in the US economy.

But productivity growth is currently running at 2.7% on a year to year basis. That's why inflationary pressures are no more.

And that's why we're seeing still a strong rebound on the supply side of the economy..