The latest initial jobless claims reading and July's retail sales report quelled investor fears of a recession. PIMCO managing director and economist Tiffany Wilding joins Morning Brief to discuss the state of the economy and what it signals about the Federal Reserve's next interest rate decision.

Wilding notes that recession fears were sparked when July's jobs report triggered the Sahm Rule, where the unemployment rate increases beyond the "historical trigger." However, she explains that the drivers behind the rise in unemployment are different this time compared to other times the Sahm Rule was triggered and a recession kicked off:

"You always want to be careful of 'this time is different comments,' but we've had extremely good labor supply gains over the last few years. And obviously, that's been helped by the immigration surge that we've had. And when you have labor supply gains, that's driving the unemployment rate instead of actual levels of employment, labor shedding, job losses, then that suggests the economy is slowing for sure. Labor markets are becoming in better balance. But you know, we're not in a recession right now."

She explains that the US economy is "just finally getting back to a more normal state after the unique set of factors that hit it during the pandemic," and as the economy normalizes, monetary policy does not have to be restrictive. While many investors have their hopes up for a 50-basis-point interest rate cut in September, she notes that such an aggressive move is typically seen during a recession, which the economy currently is not experiencing.

Whether the Fed opts for a 25 or 50-basis-point cut, Wilding emphasizes the importance of communication. "I think they want to be a little bit careful not to send negative signals about the economy in what they're doing. So, you know, I think whatever they do, they're going to want to say, 'We think the economy is doing fine. Certainly things are slowing, and we think it's now time to return monetary policy to more normal territory.'"

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This post was written by Melanie Riehl