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

Further policy easing would risk sparking inflation just as oil prices rebound and China seeks to jump start its economy, according to the founder of Yardeni Research Inc., who famously coined the “Fed Model” and the “bond vigilante.”

The market prognosticator says the central bank’s September decision to lower rates by half a percentage point — a move usually reserved to tackle a recession or market crash — was “not necessary” with the economy riding high and the S&P 500 hovering near records. 

“They don’t need to do more,” Yardeni wrote in an e-mailed response to questions. “I assume several Fed officials regret doing so much.”

Stocks climbed Friday while Treasury yields and the dollar spiked after government data showing the biggest increase in nonfarm payrolls in six months. The report also revised up the hiring numbers for the prior two months and indicated a drop in the unemployment rate. 

Yardeni is the latest to chime in on Fed policy after the data on job growth topped all estimates. Earlier 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. to trim their forecast for the Fed’s November interest-rate cut to a quarter-point from a half-point, echoing moves in swap contracts tied to the outcome of future Fed meetings.  

Still, calling the Fed to pause completely for the rest of 2024 is out of consensus, to say the least. Many investors consider the Fed’s latest rate cut as a step toward normalizing its policy amid easing inflation after a round of aggressive tightening took the benchmark borrowing cost to a two-decade high.

That said, it’s an idea Ian Lyngen is now mulling. While the head of US rates strategy at BMO Capital Markets is sticking to his forecast for a quarter-point reduction in November, he reckons a slew of data on employment and inflation will determine the Fed’s policy trajectory before its Nov. 7 meeting. Should October’s payrolls report come in comparably strong and inflation prove sticky, US central bankers will likely refrain from rate cuts for now, per Lyngen. 

“If anything, the employment update suggests that the Fed might be revisiting the prudence of cutting in November at all – although a pause is not our base case,” he wrote in a note to clients. “In our endeavor to be intellectually honest, it is worth briefly pondering what it would take for the Fed to pause next month.” 

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

“Any further rate cuts would increase the odds of our 1990s-style meltup 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.