Michelle Bowman makes the case for rate cuts – The Daily Tearsheet

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are up small.

The week ahead will be dominated by the Consumer Price Index on Tuesday and the Producer Price Index on Thursday. We will also get retail sales, consumer sentiment, and a slew of Fed speakers.

Nonfarm productivity rose 2.4% in the second quarter, which was much better than the Street estimate of a 1.9% increase. Productivity is a big deal since it allows for the economy to grow faster without triggering inflation. Unit Labor Costs rose 1.6%, which was also higher than expected.

First quarter productivity was revised downward by 0.3%.

The Trump Administration is imposing a 15% levy on AI chip sales to China, affecting AMD and Nvidia. This fee is in exchange for an export license to sell their newer chips to China. “We follow rules the U.S. government sets for our participation in worldwide markets,” Nvidia said in a statement Sunday. “While we haven’t shipped H20 to China for months, we hope export control rules will let America compete in China and worldwide.”

National security hawks have been reluctant to sell these chips to China for fear it will boost their military. The US Government generally gets veto power over sensitive national security sales and the Pentagon usually gets whatever policy it wants.

The Biden Administration also put export controls on Nvidia’s chip sales to China, so this isn’t completely unprecedented.

Donald Trump has nominated his Council of Economic Advisors head Stephen Miran to replace Adriana Kugler on the Board of Governors. He will serve out the remainder of her term, which expires in January. “By selecting Miran, Trump has made a stop-gap appointment and given himself until January to make the main call,” Marco Casiraghi, senior economist and strategist at Evercore ISI, said in a note. “This way Trump did not tie his hands, keeping his options open regarding the choice of the new Fed governor and especially the new Fed chair.”

Fed Governor Michelle Bowman said that the Fed should be cutting rates because the labor market is weakening and it looks like the inflationary impact of tariffs will be muted.

At last week’s FOMC meeting, I dissented from the Committee’s decision to hold the policy rate at its current level. Today I’d like to share some additional perspective about my views on the economy. So far this year, the FOMC has held the target range for the federal funds rate steady at 4-1/4 to 4-1/2 percent. Earlier this year, I believed our policy stance was appropriate, giving time to allow the Committee to monitor the progress of inflation toward our goal and to better understand the impacts of the Administration’s policies on the economy.

At the June FOMC meeting and in a speech shortly following that meeting, I began to lay out my reasoning to support the process of beginning to gradually lower the federal funds rate in July based on my assessment of signs of fragility in labor market conditions.² In my view, economic conditions appeared to be shifting, and as a result, we should reflect this shift in our policy decisions. Inflation has moved considerably closer to our target, after excluding temporary effects of tariffs, and the labor market has remained near full employment. As my dissent statement notes, with economic growth slowing this year and signs of a less dynamic labor market becoming clear, I see it as appropriate to begin gradually moving our moderately restrictive policy stance toward a neutral setting. 

On trade policy, foreign suppliers are absorbing some of the new tariffs, and importers are shifting to lower tariffed sources. Slack in the economy should also allow for only limited one-time price effects this year and very little, if any, “second-round” effects on inflation in the medium term. I also expect that less restrictive regulations, lower business taxes, and a more friendly business environment are likely to boost supply and offset any tariff-related effects on economic activity and prices over the medium term.