As oil prices recover and China seeks to revitalize its economy, further policy easing risks triggering inflation, according to the founder of Yardeni Research, famous for inventing the Fed model and bond vigilantes. That’s what it means. The central bank’s decision in September to cut interest rates by 0.5 percentage points, a measure normally reserved for dealing with recessions and market crashes, came as the economy was doing well and the S&P 500 index was near record levels. “It wasn’t necessary,” he said.
“They don’t need to do anything more,” Yardeni wrote in an emailed response to questions. “I think some Fed officials may regret having done so much.”
Stocks rose on Friday after government data showed nonfarm payrolls rose by the most in six months, while Treasury yields and the dollar soared. The report also revised upward the payroll numbers for the past two months, indicating a decline in the unemployment rate.Yardeni was the latest to speak out about Fed policy after job growth statistics exceeded all expectations. Earlier Friday, former Treasury Secretary Larry Summers said the central bank’s decision to cut interest rates last month was “a mistake.”
The announcement also prompted economists at Bank of America and JPMorgan Chase & Co. to lower their forecast for a November rate cut by the Fed, from 0.5 percentage point to 1/4 percentage point. Upcoming Fed Meetings.
Still, asking the Fed to shut down completely for the remainder of 2024 is out of consensus, to say the least. For many investors, the Fed’s latest rate cut is a step toward policy normalization as inflation eases after a series of aggressive tightening drives benchmark borrowing costs to 20-year highs. That’s what I think.
However, this is an idea that Ian Lingen is currently considering. BMO Capital Markets’ head of U.S. interest rate strategy is holding firm on his forecast for a quarter-point cut in November, but a trove of data on employment and inflation will likely influence the Fed’s policy by its Nov. 7 meeting. It is expected that the orbit will be determined. If October’s employment report turns out to be relatively strong and inflation is solid, U.S. central bankers are likely to refrain from cutting interest rates for now, Lingen said.
“If anything, the jobs report suggests the Fed may reconsider its prudence in cutting interest rates in November, although a rate cut is not our base case,” he wrote in a note to clients. said. “In our effort to be intellectually honest, it’s worth briefly considering what it would take for the Fed to stop next month.”
For critics of the Fed’s policy shift, there is no doubt that the market has already priced in too many rate cuts. According to Yardeni, there is a risk that further easing could fuel investor euphoria and trigger a painful event in the market.
“Further rate cuts would increase the likelihood of a stock market crash scenario similar to the 1990s,” he said. In this episode, the S&P 500 lost more than a third of its value from high to low.
