Ed Yardeni sees Fed pausing rate cuts for 2024 after jobs report

Further easing of policy would risk fueling inflation as oil prices rebound and China tries to jump-start its economy, according to the founder of Yardeni Research Inc., which coined the famous “Fed Model” and “bond vigilance.”

The market forecaster says the central bank’s decision in September to cut rates by half a percentage point – a move usually reserved to deal with a recession or market crash – was not “necessary”, with the economy on high and the S&P 500 approaching records.

“They don’t need to do more,” Yardeni wrote in an emailed response to questions. “I suppose a few Fed officials regret doing so much.”

Stocks rose on Friday as Treasury yields and the dollar rose after government data showed the biggest increase in non-farm payrolls in six months. The report also revised the hiring numbers for the past two months and indicated a drop in the unemployment rate.

Yardeni is the latest to weigh in on Fed policy after the job growth data beat all estimates. Earlier on Friday, former Treasury Secretary Larry Summers said the central bank’s decision to cut interest rates last month was “a mistake”.

The release also prompted economists at Bank of America Corp. and JPMorgan Chase & Co. cut its forecast for a November Fed rate cut to a quarter point from half a point, picking up moves in swaps linked to the outcome of the Fed’s upcoming meetings.

However, calling for the Fed to shut down completely for the rest of 2024 is outside the consensus, to say the least. Many investors see the Fed’s latest rate cut as a step toward normalizing its policy amid easing inflation after a round of aggressive tightening pushed the benchmark cost of borrowing to a two-decade high.

That said, it’s an idea that Ian Lyngen is now considering. While BMO Capital Markets’ chief U.S. rate strategist is sticking to his forecast for a quarter-point cut in November, he believes plenty of data on employment and inflation will determine the path of Fed policy ahead of its meeting on November 7. If October’s payrolls report is comparably strong and inflation proves sticky, US central bankers are likely to hold off on rate cuts for now, according to Lyngen.

“Otherwise, the employment update suggests the Fed may revisit the caution of tapering at all in November — although a pause is not our base case,” he wrote in a note to clients. “In our effort to be intellectually honest, it’s worth considering briefly what it would take for the Fed to cut next month.”

For critics of the Fed’s policy shift, the market has already priced in too many rate cuts. The risk, according to Yardeni, is that further easing will fuel investor euphoria, which will set the stage for a painful market event.

“Any further rate cuts would increase the chances of our 1990s-style stock market meltdown scenario,” he said. In that episode, the S&P 500 lost more than a third of its value from peak to trough.