The Fed will cut rates only once this year because the US economy is too strong, market expert says

• According to Ed Yardeni, the Fed will likely cut interest rates only once this year.

• The market vet dismissed the market’s bets on ambitious rate cuts because the US economy is too strong.

• Inflation is on track to meet the Fed’s target, but the labor market will heat up again, Yardeni predicted.

Investors expecting steep interest rate cuts as inflation continues to cool this summer may be disappointed as the US economy appears too strong to justify the Fed’s sharp easing.

That’s according to Ed Yardeni, chairman of Yardeni Research and a longtime Wall Street veteran who is calling for just one rate cut from the central bank this year. His prediction runs counter to what most investors expect, with markets betting on cuts of 100-125 basis points by the end of the year, according to CME’s FedWatch tool.

“I’ve been opposed to a rate cut, but I’m a reasonable person. If the Fed signals that they’re going to cut, no matter what I think, that’s going to happen, but I think it’s a quarter of a point. And it’s one and done for the year.” , he told CNBC in an interview on Wednesday.

Markets began raising expectations for a Fed rate cut after a surprisingly weak jobs report in July, where unemployment hit its highest level since the pandemic. Recession fears then rose, causing a brutal selloff in stocks.

Overall, however, the U.S. economy appears to be on solid footing, making steep rate cuts unnecessary, Yardeni said.

Next month’s jobs report is certain to be stronger, Yardeni predicted, echoing other commentators who said July’s data could have been skewed by severe weather events.

Meanwhile, inflation is on track to fall back to the Fed’s 2 percent target by the end of the year, Yardeni said. Consumer prices continued to fall last month to 2.9%, below the expected 3% annual increase.

Finally, GDP growth is positive and appears to be reaccelerating after the decline in the first quarter. The economy grew 2.8 percent in the last quarter, according to the Commerce Department’s advanced GDP estimates.

Still, the outlook for a recession remains mixed on Wall Street, with some forecasters saying markets have yet to see the full impact of higher interest rates. The New York Fed sees a 56 percent chance the economy will enter a recession by July next year.

Read the original article on Business Insider