The Fed’s 2024 easing campaign may already be over Strong business report Friday highlights the stubborn resilience of the world’s largest economy, according to Wall Street veteran Ed Yardeni.
Further policy easing would risk sparking inflation as oil prices rebound and China seeks to stimulate its economy, according to the founder of Yardeni Research, who is best known for coining the “Fed model” and the “bond guard.”
The central bank’s September decision to cut interest rates by half a percentage point — a move usually reserved to address a recession or market crash — was “not necessary” with the economy surging and the S&P 500 hovering near records, a market forecaster says.
“They don’t need to do more,” Yardeni wrote in an email response to questions. “I assume many Fed officials regret doing so much.”
Stocks rose on Friday while Treasury yields and the dollar rose after government data showed the largest increase in nonfarm payrolls in six months. The report also revised employment figures for the previous two months and indicated a decrease in the unemployment rate.
Yardeni is the latest to chime in with Fed policy after data on job growth beat all estimates. Earlier Friday, former Treasury Secretary Larry Summers said the central bank’s decision to cut interest rates last month was “mistake“.
The statement also prompted economists at Bank of America Corp. and JPMorgan Chase & Co. to lower their forecasts for a Fed rate cut in November to a quarter of a percentage point from half a percentage point, reversing the moves in November. Switch The contracts are linked to the results of future Fed meetings.
However, the Fed’s call for a complete pause for the rest of 2024 is inconsistent, to say the least. Many investors view the Fed’s latest interest rate cut as a step toward normalizing its policy amid easing inflation after a round of aggressive tightening that sent the benchmark borrowing cost to its highest level in two decades.
However, it is an idea that Ian Lingen is considering now. While the head of US interest rates strategy at BMO Capital Markets is sticking with his forecast of a quarter-percentage point cut in November, he believes a slew of data on employment and inflation will determine the course of the Fed’s policy ahead of its November 7 meeting. If the October jobs report comes in relatively strong and inflation holds steady, US central bankers will likely hold off on cutting interest rates for now, according to Lingen.
“If anything, the hiring update suggests the Fed may reconsider the wisdom of November tapering at all — even though a pause is not our base case,” he wrote in a note to clients. “In our effort to be intellectually honest, we should briefly consider what it would take for the Fed to pause next month.”
Critics of the Fed’s policy shift argue that the market has already priced in too many interest rate cuts. The risk, according to Yardeni, is that additional easing fuels investor euphoria which will set the stage for a traumatic market event.
“Any further interest rate cuts would increase the likelihood of a 1990s crash scenario for the stock market,” he said. In that episode, the S&P 500 lost more than a third of its value from peak to trough.