Not Restrictive
Doug Nolan
In his argument for a July rate cut, Fed Governor Christopher Waller states that “tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge.”
Moreover, “a host of data argues that monetary policy should be close to neutral, not restrictive.”
“The [GDP and employment] data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3%, and not where we are—1.25 to 1.50 percentage points above 3%.”
The Atlanta Fed GDPNow Forecast has Q3 growth up around 2.4%, a notable acceleration from the first half.
As for the labor market, June’s Unemployment Rate dipped a tenth to a historically low 4.1% (hasn’t been lower since January).
Data suggests labor market tightening.
Weekly Jobless Claims dropped last week to a three-month low of 221,000.
The most recent (May) JOLTS data surprised with a hefty (almost 400k) jump in job openings to a six-month high of 7.769 million.
July 14 – Bloomberg (Rachel Graf):
“Companies rushed to tap the US leveraged-loan market for debt on Monday, leading to the market’s busiest day since January.
The week kicked off with 19 leveraged-loan launches, worth about $24 billion…
That’s the most since Jan. 21, when more than 30 firms tapped the market for $48 billion of debt.”
More evidence this week that notably loose financial conditions are working their magic.
Bloomberg: “Retail Sales Surge in Broad Advance, Topping Estimates.”
Retail Sales were up 0.6% (expectations 0.1%) for the month and 3.3% y-o-y.
Empire Manufacturing and the Philadelphia Fed Business Outlook were much stronger-than-expected, with Industrial Production and Capacity Utilization above expectations.
Housing Starts and Building Permits beat forecasts.
University of Michigan Current Conditions gained two points to a stronger-than-expected 66.8, up nearly eight points in two months to the highest reading since January.
For comparison, Current Conditions were at 62.7% last July.
Inflation data, as it has lately, offered something for everyone.
June headline CPI was reported at 0.3%, up from May 0.1% - placing y-o-y CPI at a four-month high of 2.7%.
“Core” CPI added a tenth to a four-month high of 2.9%.
Axios: “Trump’s trade war begins to show up in inflation data.”
JPMorgan: “June 2025 CPI report: Tariffs are having an impact on consumer prices.”
NYT: “U.S. Inflation Accelerated in June as Trump’s Tariffs Pushed Up Prices - Prices of products most exposed to tariffs, like household furnishings, jumped 1%, significantly higher than the 0.3 rise last month.
Prices for appliances, specifically, rose 1.9%...
The apparel index increased 0.4%, snapping multiple months of declining prices.
Gasoline prices rose 1% in June…
Grocery prices also rose, ticking up 0.3% in June.”
July 15 – Wall Street Journal (Editorial Board):
“President Trump insists there is ‘no inflation’ as he bludgeons the Federal Reserve to cut interest rates.
But denying inflation reality won’t make it go away.
His tariffs are making it harder for the central bank to do what he wants, as last month’s rise in the consumer-price index shows.
The… consumer-price report… showed inflation ticked up in June…
Price increases were broad-based, and especially in goods that the U.S. imports.
Think toys (1.8%), paper products (1.4%) and appliances (1.9%).
The latter was the biggest increase since August 2020.
Food prices rose 0.3% despite a 7.4% decline in egg prices.
One culprit was fresh fruit and vegetables (1%), the biggest increase in more than a year.
About 60% of fresh fruit and 35% of fresh vegetables are imported.”
As for tariffs, we’re in uncharted territory with great uncertainty.
Especially with inflation exceeding the Fed’s 2% target for more than four years, it’s uncentral banker-like to dismiss inflation risk.
To argue a 3% “neutral rate” and currently overly restrictive monetary policy is a stretch.
After an abrupt early-April (“liberation day”) tightening, financial conditions loosened dramatically throughout Q2.
This was earnings week for the major “banks.”
And when it comes to financial conditions, it is always Credit and financial sector expansions where the analytical rubber meets the road.
Before highlighting some Q2 bank data for the largest banks, it’s important to appreciate the financial boom that had taken full control during Q1.
From Q1 Z.1 report analysis: Bank Assets jumped $581 billion, or 8.4% annualized, during Q1 to a record $28.388 TN – the largest quarterly growth since Q4 2021.
Bank Assets ballooned $6.988 TN, or 33%, over 21 quarters.
For Q1, Bank Loans increased $52 billion, or 1.4%, to a record $14.926 TN…
Meanwhile, Repo Assets surged $84 billion, or 48% annualized (strongest since Q4 ‘18), to a record $782 billion – with one-year growth of $147 billion, or 23%.
Bank Debt Securities holdings jumped $172 billion, or 11.2% annualized, to $6.342 TN.
Debt Securities ballooned $1.660 TN, or 35.4%, over 21 quarters.
Agency Securities holdings jumped $91 billion, or 11.9% annualized, with Corporate Bonds up $71 billion, or 31.9% annualized.”
A few of the week’s headlines:
“US banking giants reap gains from dealmaking rebound, trading bump.”
“For Big Banks, the Trump Era Is Proving Profitable Thus Far.”
“JPMorgan Chase tops estimates on stronger-than-expected trading, investment banking.”
“JPMorgan Earnings Show Economy and Wall Street Are Still Chugging Along.”
“Goldman Sachs Profit Surges on Higher Trading Revenue.”
“Citigroup beats second-quarter estimates as markets and banking revenues jump.”
“Bank of America Reports Increase in Second-Quarter Profit.”
July 15 – New York Times (Rob Copeland and Stacy Cowley):
“For years, Wall Street’s top bankers have watched with a mix of envy and exhaustion as power, profits and the popular imagination shifted westward to Silicon Valley.
Being out of the spotlight, however, is proving profitable in the second Trump era.
While many industries have been upended by the president’s topsy-turvy trade and immigration policies,
Wall Street is quietly humming along just fine.
Some of the biggest lenders in America reported strong quarterly earnings on Tuesday along with increasing — if tentative — optimism that the U.S. economy has more room to run.
The reports were a reminder that in the world of high finance, uncertainty is often a chance to make money.”
July 16 – Bloomberg (Paul J. Davies):
“Where are all of David Solomon’s critics now?
Those who haven’t left Goldman Sachs Group Inc. for other firms are getting on with their jobs with gusto.
The investment bank’s chief executive officer had a torrid time cleaning up his strategic misstep into consumer banking, but two years after ending that project, its core businesses are on fire.
Goldman reported record equity trading revenue in second-quarter earnings… and trounced its peers with a rebound in investment banking revenue that was fueled by a 70% jump in deal-making fees versus the same period last year…
In equities, Goldman reported record revenue of $4.3 billion, which was made up of fees from cash and derivatives trading as clients kept adjusting portfolios to the ups and downs of White House policy, along with record lending to hedge funds, too.
The result keeps it ahead of nearest rivals Morgan Stanley and JPMorgan…”
July 16 – Bloomberg (Hannah Levitt):
“Morgan Stanley’s stock traders scored their best second quarter on record as the biggest US banks continue to reap the benefits of market volatility tied to President Donald Trump’s policy moves.
The firm earned $3.72 billion in equity-trading revenue, a 23% jump from a year ago and ahead of analyst expectations…
The firm’s closely-watched wealth management unit reeled in $59.2 billion of net new assets in the period, also surpassing predictions.”
July 16 – Financial Times (Akila Quinio):
“Bank of America notched up better than expected profits in the second quarter as the US lender expanded its deposit base and loan book and benefited from robust Wall Street trading activity.
The group’s net income rose about 3% to $7.1bn, exceeding analyst expectations of $6.8bn.
Revenues rose 4% to $26.5bn, slightly missing forecasts of $26.7bn.
Revenues at the retail bank rose 6% to $10.8bn as the group grew its deposit base and loan book and benefited from higher net interest income…”
Bank earnings analysis is fine, but balance sheets are where the action is at.
JPMorgan Total Assets surged $194.6 billion, or 18% annualized, to a record $4.552 TN during the quarter.
This put first-half growth at a staggering $549.7 billion, or 27.5%.
Total Loan growth accelerated to $56.3 billion, or 16.6% annualized – with first-half growth of $64.0 billion, or 9.5%.
Total Commercial Loan growth accelerated to $43.8 billion, or 23.7% annualized, to a record $785 billion (1st-half $62.7bn, or 17.4% annualized).
Total Consumer Loan growth accelerated to $12.5 billion, or 8.1% annualized, to a record $627 billion (1st-half $1.3bn, or 0.4% annualized).
“Fed Funds Sold & Repos” jumped $41.1 billion, or 38% annualized, to a record $470.6 billion – with first-half growth of $175.6 billion, or 120% annualized.
Short-Term and Long-Term Investments surged $96.3 billion, or 26% annualized, to a record $1.575 TN, pushing first-half growth to $317 billion, or 50% annualized.
Trading Securities posted first-half growth of $252.7 billion, or 88% annualized, to a record $829.5 billion.
“Other Assets” jumped $29.0 billion, or 39% annualized, to a $326 billion – with first-half growth of $63.3 billion, or 28% annualized.
On the Liability side, Total Deposits expanded $66.5 billion, or 10.7% annualized, to a record $2.562 TN – with first-half growth of $156.3 billion, or 13.0% annualized.
“Short-Term Borrowings and Repos” surged $86.0 billion, or 46% annualized, to a record $833.9 billion – with notable first-half growth of $329.3 billion, or 130% annualized.
Category detail will follow, but it’s worth noting that “Securities Sold Under Repo” ballooned an unprecedented $180 billion during Q1 to a record $834 billion.
“Trading Account Liabilities” surged $23.4 billion during Q2, or 63% annualized, to $173 billion.
Bank of America Total Asset growth of $91.7 billion, or 11% annualized, to a record $3.441 TN, pushed first-half growth to $179.6 billion, or 11% annualized.
Total Loan growth accelerated to $35 billion, or 12.5% annualized, with first-half growth of $47.1 billion, or 8.5% annualized.
Total Commercial Loan growth accelerated to $31.7 billion, or 19.7% annualized (to a record $674bn), with first-half growth of $43.4 billion, or 13.8% annualized.
Total Consumer Loan growth increased to $4.8 billion, or 4.1% annualized (to $473bn), with first-half growth of $7.8 billion, or a 3.3% rate.
The asset “Fed Funds Sold & Repos” posted growth of $24 billion, or 29.3% annualized to $352 billion, with first-half growth of $77.7 billion, or 57% annualized.
On the Liability side, Total Deposits grew $22 billion, or 4.4% annualized, with first-half growth of $46.1 billion, or 4.7% annualized.
“Short-Term Borrowings & Repos” surged $31.8 billion, or 24.3% annualized, to a record $555 billion – with first-half growth of $85.3 billion, or 36.3% annualized.
Citigroup Total Assets expanded $51.3 billion, or 8.0% annualized, during Q2 to a record $2.623 TN, boosting first-half growth to $269.8 billion, or 22.9%, annualized.
Total Loans expanded $29.9 billion, or 15.7% annualized during Q2 and $44.0 billion, or 11.8% annualized, for the first half.
Total Commercial Loans jumped $13.6 billion, or 17.2% annualized, with first-half growth of $28.4 billion, or 18.9% annualized.
Total Consumer Loans expanded $9.7 billion, or 10.0% annualized during Q2 – and $2.4 billion, or 1.2% annualized, during the first half.
On the Liability side, Total Deposits surged $41.3 billion, or 12.6% annualized, during Q2, with first-half growth of $73.3 billion, or 11.4% annualized.
“Short-Term Borrowings & Repos” expanded $27.8 billion, or 17.6% annualized, during the quarter – and $202.3 billion, or 89% annualized, during the first half.
Q2 detail to follow, but “Securities Sold Under Repo” ballooned $146.5 billion during Q1 to $386 billion.
The NYSE Broker/Dealer Index (XBD) surged 3.8% this week, boosting 2025 returns to 29.8%.
It is simply not credible to argue that monetary policy is restrictive or that the Fed should aggressively slash interest rates.
The administration’s attack on Powell is borderline despicable.
July 16 – Bloomberg (Lucia Mutikani):
“President Donald Trump said he’s not planning to fire Jerome Powell, and still managed to make it sound like a threat.
Trump’s comments capped a hectic few hours that took his pressure campaign against the Federal Reserve chief to a new level — and sent markets into a shortlived nosedive.
He ran the idea of sacking Powell by a receptive group of Republican lawmakers late Tuesday.
An aide said Wednesday morning he was likely to follow through.
Then the president publicly backpedaled – with a major caveat. ‘I don’t rule out anything, but I think it’s highly unlikely, unless he has to leave for fraud,’ Trump said Wednesday when asked about axing the Fed chair.”
July 17 – Associated Press (Christopher Rugaber):
“Federal Reserve Chair Jerome Powell… said the agency’s renovation of two of its buildings is in compliance with plans approved by a local commission, disputing a White House suggestion that they may have violated the law by deviating from those plans.
The letter is the latest salvo in an escalating battle between the Federal Reserve, an independent agency charged with fighting inflation and seeking maximum employment, and the Trump administration…
Vought said in his letter that if the renovation plans had changed, they were no longer ‘in compliance with the approved plan’ and may violate the National Capital Planning Act.
Powell responded… that since the Fed’s plans were approved by the NCPC in September 2021, it has made only ‘a small number of design changes to scale back or eliminate certain elements’ and added that the changes weren’t significant enough to ‘warrant... further review.’
‘The project is proceeding in accordance with the plan that the NCPC approved,’ Powell wrote.
The changes were intended ‘to simplify construction and reduce the likelihood of further delays and cost increases,’ Powell said in his letter.”
I refer to the “global government finance Bubble” for good reason.
It’s worth noting that China’s state-directed banks increased total assets $1.915 TN during Q1 to a record $63.920 TN, the strongest growth in two years.
This pushed one-year growth to over $4.0 TN, of 6.7%.
Quietly, China is pumping out record quantities of (globally impactful) Credit.
Aggregate Financing, China’s metric for system Credit, expanded a stronger-than-expected $586 billion during June, up from May’s $319 billion and June ‘24’s $460 billion.
First half growth of $3.185 TN was up 26% from comparable 2024.
Record one-year growth of $5.159 TN exceeds even pandemic 2020’s $4.852 TN.
Historic Credit expansion belies all the China deflation talk.
Corporate Loan growth of $246 billion (up 8.9% y-o-y) was up from May’s $75 billion and June ‘24’s $227 billion, with first-half growth of $1.608 TN up 5% from comparable 2024.
Consumer Loans increased $83 billion (up 3.0% y-o-y), up from May’s $8 billion and June ‘24’s $80 billion.
Government Bonds surged $188 billion for the month, easily surpassing June ‘24’s $119 billion.
Year-to-date growth of $1.067 TN more than doubled comparable 2024.
Record one-year growth of $2.177 TN compares to pandemic 2020’s $1.162 TN.
Vulnerable global bond markets will closely monitor Sunday’s national elections in Japan.
July 15 – Wall Street Journal (Ronnie Harui):
“Growing fears that Japan’s upcoming parliamentary election will strain its fiscal position sent yields on long-dated government bonds sharply higher.
Markets are fretting the Upper House election on July 20 could strip the ruling coalition of its majority and spur an increase in fiscal spending, one that might be financed by more bond issuance.
The 20-year yield on Japanese government debt rose 4.5 bps to 2.650% early on Tuesday, its highest since November 1999…
The 30-year yield rose 4.0 bps to a record high of 3.195%, while the 10-year yield rose 2.5 bps to 1.595%, the highest since October 2008.
Market participants seem to be bracing for election scenarios that could have a major impact on the Japanese government bond market, such as consumption-tax cuts, Ataru Okumura, senior Japan rates strategist at SMBC Nikko Securities, said…”
July 14 – Bloomberg (Masaki Kondo):
“Japan’s bond market is facing a potential Liz Truss moment as the risk of a ruling coalition defeat in Sunday’s election fuels concerns over fiscal policy, according to SMBC Nikko Securities Inc.
Yields on bonds with maturities of 20 years and beyond have risen at least 20 bps this month, part of a wave of selling in global bond markets as investors increasingly worry about government finances.
That has put the spotlight on a weekend election for Japan’s upper house, which local media think may end in disappointment for the ruling Liberal Democratic Party and its coalition partner.
Rival political parties have campaigned on populist promises including cash handouts, consumption tax cuts and more subsidies for education.
These pledges raise the risk of heavy selling by so-called bond vigilantes…”
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