Interest rate cuts would be a ‘mistake,’ says influential economist
The U.S. economy is finally approaching its “Goldilocks” moment—a sweet spot characterized by steady growth and shrinking inflation—and the Fed shouldn’t interfere, according to influential economist Ed Yardeni.
In an interview with Bloomberg, Yardeni said rate cuts would be a costly mistake for the Fed that could re-ignite inflation both in asset prices and consumer goods.
“The concern I have is if the Fed does start to lower interest rates, that could create a meltup, and that would be an issue for me,” he said.
The economist believes that rate cuts would fuel the stock market rally, pushing the S&P 500 to massive new highs. Although gratifying in the short term, it would make the correction far more devastating.
Unfortunately, Yardeni thinks the markets have already gotten ahead of themselves—behaving as if the Fed is about to cut interest rates sooner rather than later.
The S&P 500 set new all-time highs this week after government data showed a slowdown in consumer prices in April.
As Creditnews reported, the all-important Core CPI, which excludes volatile goods such as food and energy, posted its smallest annual increase since 2021.
Despite the apparent optimism about rate cuts, “the country is not out of the woods from the threat of inflation,” according to Christopher Rupkey, chief economist at FWDBONDS.
Because of that, the Fed continues to preach patience.
Fed in wait-and-see mode
It’s been a complicated few months for the Fed. It has gone from reassuring Americans that three rate cuts were still on the table this year to admitting that its policies haven’t been effective.
Earlier this week, Chairman Jerome Powell told a panel in Amsterdam that higher interest rates haven’t cooled the economy as much as expected.
Powell said the economy seems to be immune to higher interest rates, likely because so many Americans refinanced their mortgages at lower rates during the pandemic.
He explained that the first quarter was “notable for its lack of further progress on inflation.”
“What you have right now is a situation where these high rates aren’t generating more braking power on the economy,” said Joseph Lupton, global economist at JPMorgan. “That would suggest that they either need to stay high for longer or maybe even higher for longer.”
Other economists believe the Fed is still on track to eventually lower interest rates, but the cuts will be less aggressive than in past cycles. Tom Porcelli of PGIM Fixed Income calls this rate “normalization.”
This is a recalibration cycle,” Porcelli told Bloomberg. “People hear cuts, and that conjures images of the Fed getting aggressive.”