Krishna Guha, Evercore ISI vice chairman, joins 'The Exchange' to discuss Guha's thoughts on inflation, how employment plays into the Fed's mandate and much more.

Krishna Guha, vice chairman of Evercore ISI, stated that the Federal Reserve is positioned to cut interest rates later in the year, citing recent inflation data and labor market conditions. He described inflation as 'benign' for markets, with the latest figures showing no significant increase in goods or services prices, and noted that the absence of negative inflation surprises gives the Fed flexibility to respond to labor market softness.

Guha also emphasized the need to monitor aggregate layoffs and unemployment claims, particularly as government employment is affected by ongoing issues such as a government shutdown and delayed paychecks. While private sector labor market dynamics remain a key focus, he acknowledged that federal employment disruptions could introduce some short-term volatility in labor data.

Evercore: Fed is on track to cut rates in October and December

So joining me now is Krishna Guha. He's vice chairman of Evercore ISI. Krishna it's great to see you again. You know I think obviously there are different ways to look at everything. And that's why we have these robust discussions here on CNBC. But you call the inflation benign. When I look at 3 percent I say well isn't that still above the Fed's target rate. And a lot of consumers might say it doesn't feel so benign especially after all these months and months of increases. So that's very fair. Obviously we're writing for a market audience. And the question is it's benign for markets for sure. So why. So obviously the inflation print came in a bit cooler than expected. When you look under the hood importantly there was no sign of any sort of catch up surge of pass through of tariffs into goods prices goods prices. Inflation was actually a bit less this month than it was in August. And the services side in the round was pretty well behaved too. Now when you break that apart the positive piece there was housing services inflation very soft. The other services on a CPI measure a little bit elevated but in the round nothing to be concerned about there. And so the absence of bad news on the inflation front gives the Fed a free hand to cut rates in response to labor softness and risks. OK. That is really good context. Because you bring up labor softness and risks also is the other part of the Fed's mandate. We've been hearing more about layoffs just yesterday afternoon. Target doing a corporate layoff. Not a huge number. Eight percent of corporate staff. However it's the first such layoff that we've seen from the company in about a decade. So what do you think or how do you think that will influence the Fed's thinking on that part of the mandate. Does that change anything for you. So we always have to be a little careful reasoning from single company example. Yeah. That's not the only one. But yes as you know well and you've consistently said I think obviously the Fed is going to keep a very close eye on layoffs in the aggregate sense of course because we've been in this low higher low fire equilibrium for a while. The Fed's always been a little bit edgy that look at some point if the layoffs pick up and hiring is still unbelievably low then you could see quite a rapid deterioration for instance in unemployment. Now the best measure of course in real time as to what's going on there are the weekly UI claims. And because those are aggregated from state data we actually continue to get good visibility on that through the shutdown. And so far we've seen those UI claims broadly moving sideways. So we're not seeing any kind of red alert from the unemployment initial claims. But certainly we would track and the Fed would track layoff announcements and be very attentive to whether we start to see any pick up in that aggregate measure of the initial unemployment claims. And as we sit here a day what 23 of the government shutdown and we're starting to talk about missing paychecks effective today for some of these government workers. They're also early on was discussions or maybe threats of reduction in force. So not just a furlough but a permanent reduction. How are you understanding what's going on there when you're talking about government jobs and how that may be impacting the labor market right now. So you're absolutely right that in addition to the sort of underlying if you like private sector labor market dynamics we have to keep a very close eye on what's happening with federal and state and local employment. So actually on the federal side there's actually two things going on of course because as you know we're waiting for the the lagged effect of the doge layoffs those negotiated severances to hit the data over the next couple of prints on the labor market side. So there's a lagged effect we already know is in the pipeline that then on top of that we're going to see the furlough effects. And of course those are going to affect the potentially create some noise around the unemployment rate. And of course also paychecks are not coming out. This can potentially be some kind of fairly small but some kind of macroeconomic impact on the demand side as well. So we're going to have to think carefully about these federal government labor market effects that are taking place right now. But I think the Fed and the rest of us in the economics profession will be trying to focus as best we can on getting a read of where the underlying private sector payrolls the underlying private sector labor market dynamics are because ultimately that's going to sort of shape where we're going from here when we work through these near term very prominent government employment issues.

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