Fed inclined to cut rates they just don't want to overdo it, says Morgan Stanley's Seth Carpenter

Let's bring in Seth Carpenter. He is Global Chief Economist at Morgan Stanley as well. Seth, your take on at least the headlines that Steve gave from those Fed Minutes. Yeah, unsurprisingly, Steve did a great job in summarizing what's really important. Look, I think the facts are clear. The U.S. economy is still on pretty solid footing. The labor market had cooled, but was by no means cold. And inflation keeps coming down, but there's noise. And there's lots of sort of readings in recent months that gave some of the members of the committee pause. And so what's a central bank to do after you've cut interest rates a lot and you don't know where the neutral rate is? They ask themselves, how much further do we have to go? And they're going to keep, they're inclined to keep going. We just heard on the wires a speech from Chris Waller. They're inclined to keep cutting rates. They just don't want to overdo it. They're doing this balancing act. And I think the fact that they're getting closer to where they need to be is showing through in this sort of dispersion of views and this disagreement and just how much faster and how much further they have to go. Yeah, well, answer your own question, because, Seth, I think it's confusing to a lot of people. And by a lot of people, I'm really referring to myself, which is that in September, the Federal Reserve cut rates by a half a percentage point, a.k.a. 50 basis points. And we've been talking about the pace of rate cuts for the end of last year and all this year. And all the bond market has done is react in the exact opposite way. And bond yields continue to spike. So I think the technical term is somebody screwed up. I want to be a little bit more sympathetic to the really difficult job that Jay Powell and his colleagues have. They're reading the data coming in in real time. They're inferring from the incoming data what they have to do. We were a little bit surprised by the 50 basis point cut, the soft readings from the labor market. We thought at the time we're sort of exaggerating what was really going on. But the Fed didn't want to take any chances at that point. And as they were just starting to lower interest rates, they knew they were further away from neutral. And so if you're going to make a bit of a mistake, that would be the time to perhaps cut a little bit more. So I think they were doing risk management. And one of the paragraphs in the minutes that just came out was all about the risk management discussions. I think now what they're doing is they're reading the incoming data and asking how far do we have to go. Our view is probably two more rate cuts this year. The economy will slow but not crash for a while. There's huge uncertainty, though, about what's going to happen with tariff policy, as Steve alluded to, what's going to happen with immigration policy as well. All of that uncertainty just means they can't be confident in where how far they have to go. I guess, Steve, the point is there's a lot of people out there that were hoping that rates would go down so they could afford a mortgage to buy a home. And they heard rate cuts and they probably automatically assumed that rates were going to go down. And they did go down, by the way. And maybe they did something in September. If they did, good for them. You timed it perfectly. But if you didn't, maybe you thought, I'm going to wait and rates will keep going down. But they haven't gone down. Is there anything you've seen or something you've talked to that can explain why the Fed is cutting but bond yields are soaring? You know, Brian, that's a great question. Because reading these minutes in the 23 minutes that we get to read them, I was struck by the idea that this did not generally read like the set of minutes from a meeting where you would cut interest rates. Unless you are good darn sure that you're above the neutral rate and restricted. There were parts of this thing that you could read, like two-thirds of it, that would read like the kind of minutes from a meeting where they either held the policy rate the same or even raised the policy rate. It was a very unusual situation when you look at the discussion about the possibility of inflation stalling, when you look at the uncertainty around fiscal policy that's coming from trade and immigration. So you're right in the sense that the rate cut was, I think, a little unexpected by some people. And then you have people in the room there. We got some of that when we looked at the dot plot as well. But there was more than one person in the room who didn't want to hike rates. Now, not everybody got the vote. And sometimes there may be some people, Brian, who voted for the rate cut that didn't really think it was the best course of action, may have gone along with the majority on that. But you're right in the sense that we thought rates were going to come down. And if you look at that chart of the 10 years since September, they have gone straight back up. But the key here that I think is important for the Fed, and maybe Seth wants to comment on this, is that the substantial part of the increase is not from inflation expectations. It's from term premium. And that may have more to do with growth prospects, productivity prospects, as well as the fiscal outlook.