Federal Reserve Governor Michelle Bowman’s radical rate cut theory is criticized by Wall Street; Morgan Stanley: The argument is questionable and incomplete

According to the Zhitong Finance APP, Federal Reserve Governor Stephen Milan emphasized the necessity of significant interest rate cuts in public, but his views have sparked widespread skepticism among Wall Street and the economist community. As a former senior economic advisor to the Trump administration, Milan cast a dissenting vote at the FOMC meeting on September 16-17, shortly after taking office, advocating for a one-time cut of 50 basis points instead of the officially approved 25 basis points.

On September 22, Milan delivered a speech at the Economic Club of New York, calling for a rapid achievement of the neutral rate level (the interest rate level that neither stimulates nor hinders economic growth) through significant rate cuts. He also added that if necessary to demonstrate this position, he might continue to vote against at the upcoming Federal Reserve meeting.

Milan's core argument is based on an assessment of the Trump administration's trade, immigration, tax, and regulatory policies, which he believes have significantly lowered the interest rate levels needed to guard against inflation, resulting in the current benchmark rate being too high. He pointed out that Federal Reserve policymakers have not fully recognized this structural change and urgently need to achieve the neutral rate target through significant rate cuts—meaning a level that neither stimulates nor hinders economic growth.

However, this view has faced multiple rebuttals. JPMorgan economist Michael Feroli bluntly stated that his argument is "questionable, incomplete, and unconvincing," while Bloomberg Economic Review emphasized that, given inflation rates have been above the 2% target for four consecutive years and market expectations suggest they will remain high in the coming years, the burden of proof for extreme easing lies entirely with Milan.

There are significant divisions within the Federal Reserve regarding the pace of rate cuts. St. Louis Fed President Alberto M. Musalem warned that further easing space is "limited" in the context of high inflation; San Francisco Fed President Mary Daly, while supporting continued rate cuts, believes the timeline needs to be cautiously set.

Economic data from September further exacerbated policymakers' hesitations: the U.S. economy grew at its fastest pace in nearly two years in the second quarter, and August's business equipment orders, trade deficit, and initial jobless claims all indicate that the economy is maintaining a good growth momentum in the third quarter.

Notably, the potential inflation indicator favored by the Federal Reserve remains stubbornly at 2.9%, nearly a percentage point above the 2% target. Karl B. Weinberg, chief economist at High Frequency Economics, pointed out that the steady growth in consumer spending data for August "completely does not support Milan's suggestion for an immediate significant rate cut."

Despite the ongoing controversy, Milan remains steadfast in his position. In a television interview last week, he warned that if the Federal Reserve does not act swiftly, it could harm the economy, reiterating his plan to achieve the neutral rate through consecutive rate cuts.

However, some economists acknowledge that part of his logic has merit. Neil Dutta, head of macro research at Renaissance Macro Research, believes that the neutral rate may be slightly lower than the Federal Reserve's current expectations, thus making policy restrictive, but he questions whether the actual neutral rate is as close to zero as Milan claims, pointing out that "if the true neutral rate is zero, as Milan asserts, the economy and financial markets would have already collapsed, let alone talk about an 'economic golden age'?"