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Jacob Sonenshine: We're about to get a major clue as to where the Fed will take rates later this month. Here we have former fed member and founder and CEO of Quill intelligence, Daniel, Danielle DiMartino Booth. Thanks for being here.

Danielle DiMartino

Booth: Happy to be here today.

Jacob Sonenshine: The unemployment numbers on Friday were a miss. So would you say the Federal Reserve is actually slightly less likely to cut rates now?

Danielle DiMartino

Booth: Well, I think that the top line strength that we saw in nonfarm payrolls definitely gives the Fed cover to not lower rates by 50 basis points, but the market still has fully baked into the cake one 25 basis point rate cut come July 31st. I can't tell you what could possibly throw that probability off and the stock market certainly wouldn't like it.

Jacob Sonenshine: Most people are saying, hey, we don't think a 50 basis point cut is a good idea right now. It's too much. Some people want it. A lot of those are stock investors. If you're on the Fed right now, what do you do?

Danielle DiMartino

Booth: Well if you're in the Fed right now, you're thinking back to history and the fact that your average rate cutting campaign involves 525 basis points of cuts, not the 225 that you have to work with, so you really want to preserve to the greatest ability that you can, the other rate cuts. Powell doesn't even want to cut in July, but he knows that he would tank the markets if he didn't and then that would become a self fulfilling prophecy in and of itself because CEOs change their minds when they see their stocks going down. They're like, oh, those layoffs. Yeah, we'll go ahead and proceed with them. Then it bleeds into the real economy.

Jacob Sonenshine: Powell is going to talk to congress on Wednesday. Today's Tuesday. Powell's going to talk to Congress on Wednesday and Thursday. Is he going to mention, would you guess that he's going to mention something about the New York feds report on rising recession probability?

Danielle DiMartino

Booth: No, I don't think he brings anything like that up because again, he doesn't want to, he doesn't want for the markets to read anything more dovish into his stance than what they already have. He's going to emphasize that overseas growth slowing and the potential, uncertainty around the trade war are what's going to compel him. He's going to basically reiterate what he said in his last press conference and maintain that because our latest retail sales, and again the headline job's number was strong, he's going to maintain that the US economy is still on solid footing.

Jacob Sonenshine: Might he be less explicit in his, will he be very careful with his language?

Danielle DiMartino

Booth: Oh, I think, I think he's going to be walking on eggshells because we don't hear from Powell very often. Former fed shares have spoken with much greater frequency than Powell and, and he knows he's under a microscope right now.

Jacob Sonenshine: All right. Real quick, the S&P 500 is up 18% year to date. That's a really nice gain for halfway through one year. So even if in a few days it's clear that there will be a fed rate cut. How much more upside do we have with stocks?

Danielle DiMartino

Booth: It's really hard to say. Typically if you look at rate cutting episodes in the past, the market might get a little juice off the first or the second one potentially. So we might go into September and then we realize that we're in recession and you start to give back those gains and you realize that there's a fundamental reason that the Fed is cutting rates, which was definitely reflected in the New York feds recession probability index popping up to a 12 year high this week, which has never not coincided with recession outside of one time in the late 1960.

Jacob Sonenshine: Limited upside with risk assets. Something I've been seeing a little bit more in the last few days. Danielle, thanks a lot for joining us.

Danielle DiMartino

Booth: Absolutely.

Federal Reserve Chairman Jerome Powell is speaking in front of the House Financial Services Committee Wednesday, and one former Federal Reserve member explained what the market is likely to hear from the man of the hour. 

"The top line strength that we saw in nonfarm payrolls definitely gives the Fed cover to not lower rates by 50 basis points, but the market still has fully baked into the cake one 25 basis point rate cut come July 31st I can't tell you what could possibly throw that probability off and the stock market certainly wouldn't like it," said Danielle DiMartino Booth, former adviser to the president of the Dallas Fed and founder and CEO of Quill Intelligence. 

Economic data in the U.S. has decelerated notably, a trend that has sustained itself since the final quarter of 2018. As investors have priced in a 25 basis point rate cut, the 10 year treasury is now yielding a hair above 2%, down from a 2019 high of 2.7%. The S&P 500, is up 18% on the year, as stock investors are starved for stimulus. 

And the stock market may be having its way. 

"Powell doesn't even want to cut in July, but he knows that he would tank the markets if he didn't and then that would become a self fulfilling prophecy in and of itself because CEOs change their minds when they see their stocks going down. They're like, 'oh, those layoffs. Yeah, we'll go ahead and proceed with them.' Then it bleeds into the real economy," DiMartino said. If companies think they'll have a higher cost of debt, they'll invest less and hire less.  

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