Despite recent improvements in inflation and economic indicators, analysts at Yardeni Research argue against a Fed rate cut this year. May personal consumption expenditures data suggest inflation is on track to hit the Fed’s 2.0% target by year-end.
Moreover, consumer spending remains strong, in line with the positive economic outlook. “Moderate inflation amid a strong economy argues against the Fed easing monetary policy this year,” the firm says.
Fiscal policy also supports maintaining current rates, according to the firm. It notes that the federal deficit has reached 6.7% of GDP, a record for economic expansion, while the unemployment rate has remained below 4.0% for 30 months.
In addition, the company believes that this fiscal stimulus could help revitalize the economy and inflation if interest rates are lowered. The company notes that “the Fed is effectively fighting a fiscal stimulus that would revitalize the economy and inflation if interest rates are not maintained at their current high levels.”
Analysts also believe labor market and growth indicators point to a hold on interest rates. They point to the Atlanta Fed’s GDPNow model projecting real GDP growth of 2.2% in the second quarter, in line with the previous year’s trend, while strong economic performance in the services and high-tech sectors reduces sensitivity to higher interest rates, they say.
Finally, the risks of financial market reactions to interest rate cuts are significant, according to the firm. “A preemptive rate cut would further expand tech sector valuations and invite a large-scale stock market meltdown similar to the one that occurred in the late 1990s,” it warned.
With a healthy economy, moderate inflation, and a stable labor market, the firm concluded that the Fed should keep the federal funds rate steady through the remainder of the year.
