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It’s amazing how quickly things can change in a week.
It seems like only yesterday that it was thought that the Fed would not be able to cut fees in September. Now we are starting to price with 25 basis point cuts as well as the chance of 50 bps!
In a business interview with Fox on Tuesday, Treasury Secretary Bescent added fuel to the speculation, saying, “The real thing to think about now is that we need to get a 50 basis point rate cut in September.”
I remember when Bescent said he would not comment on future monetary policy decisions. But here we are.
So should the Fed cut 50 bps in September? Let’s look at both sides of the discussion.
There are no cuts
This month’s CPI print has been quite tame and consensus, but there are some underlying inflationary pressures.
One of the biggest drivers of developmental stories in the past few years, Core Goods is driven primarily by tariffs.
Despite reports of rather troubling work last week, the future-looking estimates point to the labor market, which is beginning to re-climb again.
The latest business manager survey showed a higher volume of companies planning a meaningful increase in staff next year.
Looking at Visa’s US Expenditure Index, it appears that consumers are quite resilient in the face of tariffs, and their spending habits tend to be higher.
Based on this confluence of data, I was able to argue that the economy is beginning to re-stimulate. If the Fed is cut in September based on delayed data such as NFP, it could be a mistake that would sell out the bond market, just like when the Fed did the same.
Cut it to grow bigger
Consumption is the engine that drives the US economy. Since the fourth quarter of 2024, it has been meaningfully slow.
With the continued implementation of tariffs, we can see consumer spending even weaker, which could further degrade consumer spending as a drop in power purchased.
Meanwhile, tariff collection continues to skyrocket higher. And someone has to make that bill.
If businesses hand over customs duties to consumers, those high prices will ultimately undermine aggregate demand. Without offset, this is growth-negative.
When businesses absorb price hikes, they narrow down their profit margins and also reduce economic output. Either way, that is negative for growth prospects.
