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Doves and hawks debate Fed policy, the rout in chips spreads and the UK battles a “fire sale” in bond markets. Federal Reserve Vice Chair La [View in browser]( [Bloomberg]( Doves and hawks debate Fed policy, the rout in chips spreads and the UK battles a “fire sale” in bond markets. Doves vs hawks Federal Reserve Vice Chair Lael Brainard [articulated a view]( that the central bank should exercise caution in its rate-hiking campaign. In comments on Monday, Brainard advised the Fed should move forward "deliberately" and in a "data-dependent manner" to gauge how previous rate hikes are working through the economy. This contrasts with strategists at Goldman Sachs, who said it’s [too early]( to price in a dovish pivot from the Fed. Cecilia Mariotti and her team warned two-year yields would need to peak to see a top in Fed hawkishness. Chips pain Asia’s top [chip stocks tumbled]( in an escalating US-China tech race that has erased more than $240 billion from the sector’s global market value. Taiwan Semiconductor Manufacturing, the world’s largest contract chipmaker, plunged a record 8.3% while Samsung Electronics and Tokyo Electron also declined. That comes as the US imposes sweeping curbs on companies that conduct technology business with China. Investors [tallying up the damage]( see a further blow to TSMC, as well as a raft of Chinese up-and-comers, that underpin the $550 billion chip industry. `Fire sale’ The Bank of England was again forced to step in and stop what it called “[fire sale dynamics](” in bond markets. A day after [extending emergency measures]( to backstop pension funds, the central bank said on Tuesday that it’s adding inflation-linked debt to its bond purchases. That comes after a severe selloff that saw yields on so-called linkers surging by the most on record. Meanwhile, the influential Institute for Fiscal Studies estimated Chancellor Kwasi Kwarteng will need to[find savings of at least £60 billion]( ($66 billion) to shore up confidence by the time he presents his fiscal plan on Oct. 31. Fragile markets The mood in markets is fragile ahead of Thursday’s US inflation data, with the case for another 75 basis-point rate hike from the Fed likely to be strong if the reading comes in higher than than forecast. US futures fell while Treasuries yields surged. The S&P 500, Nasdaq 100 and Dow futures each declined about 0.9% as of 6:15 a.m. New York time. In Europe, the Stoxx 600 fell about 1% as miners led sectors lower along with chemicals and energy firms. The dollar was slightly firmer. Coming up… Focus turns to inflation data from tomorrow, with US PPI readings and then CPI later in the week, but there are some numbers to get through while we wait. Today brings US NFIB Small Business Index IBD/TIPP economic optimism. It's day two of the IMF meetings, and central-bank speakers include voices in the US, Switzerland and the UK. Corporate events include Meta's virtual conference and an investor conference by JPMorgan and Robin Hood. This week’s MLIV Pulse survey focuses on housing markets, inflation and the cost-of-living crisis. Which central bank will blink first and stop raising rates? Share your views [here](. What we’ve been reading Here’s what caught our eye over the past 24 hours: - Credit Suisse awaits its day in court](over currency rigging claims. - The [Big Smoke goes green](: how London became a pioneer in electric cars. - [China wants growth above 5%]( — here’s how it gets there. - Before reviving his bid, [Elon Musk lobbed]( more accusations at Twitter. - The [Ritz-Carlton Superyacht]( is getting ready to set sail. - Singapore Airlines won’t[fire pregnant flight attendants]( anymore. And finally, here’s what Joe’s interested in this morning Yesterday in Chicago, I watched Fed Vice Chair Lael Brainard give a lunchtime speech at the National Association for Business Economics annual conference. Of course, the main topic of her speech - and the main thing on everybody's mind -- was the high inflation, what's causing it, and what the Fed will do to bring it down. Of course, everybody's waiting for the eventual "pivot" and how far off that might be. As Brainard sees it, part of defeating inflation is decreasing aggregate demand, by cooling the labor market. But she still sees several factors that might be characterized as transitory. Here are the two key paragraphs from the speech on the inflationary drivers that may dissipate as the economy normalizes: “Since the pandemic, significant supply and demand imbalances have coincided with large increases in retail trade margins in several sectors. In some sectors, the increase in the retail trade margin exceeds the contemporaneous increase in wages paid to the workers engaged in retail trade, although this is not true in food and apparel. The return of retail margins to more normal levels could meaningfully help reduce inflationary pressures in some consumer goods, considering that gross retail margins are about 30 percent of total sales dollars overall.” "For instance, among general merchandise retailers, where the real inventory-to-sales ratio is 20 percent above its pre-pandemic level, retail margins have increased 20 percent since the onset of the pandemic, roughly double the 9 percent increase in average hourly earnings by employees in that sector. In the auto sector, where the real inventory-to-sales ratio is 20 percent below its pre-pandemic level, the retail margin for motor vehicles sold at dealerships has increased by more than 180 percent since February 2020, 10 times the rise in average hourly earnings within that sector. So there is ample room for margin recompression to help reduce goods inflation as demand cools, supply constraints ease, and inventories increase." Of course, what nobody knows exactly is how much of the inflationary impulse will go on its own, vs how much (in theory) needs to be counteracted by rate hikes. In 2022, the story is that very little has gone away on its own so far (actually very little has gone away due to rate hikes, but that's another story). But basically, despite all the economic normalization, we've seen very little improvement across categories. That being said, it's clear that at least Brainard still sees a mix of drivers. Last week we got another robust non-farm payrolls report, with the unemployment rate falling to 3.5%. The market didn't like the development, because it's perceived that lower unemployment means more Fed tightening. And that's probably true. That being said, as long as the unemployment rate remains low, the "soft landing" scenario can't fully be ruled out. In other words, in theory there's time for inflation to come down without an unemployment surge. 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