The case against a rate cut this year

Despite recent improvements in inflation and economic indicators, analysts at Yardeni Research argue against a rate cut by the Federal Reserve this year. Personal consumption expenditures data for May indicate that inflation is on track to reach the Fed’s 2.0% target by year-end.

Additionally, consumer spending remains robust, aligning with a positive economic outlook. The firm states, “Moderating inflation with a robust economy argue against the Fed’s easing this year.”

Fiscal policy further supports maintaining current rates, according to the firm. They note the federal deficit is at 6.7% of GDP, a record for an economic expansion, while unemployment has stayed below 4.0% for 30 months.

In addition, the firm believes this fiscal stimulus could reheat the economy and inflation if rates are cut. They note, “The Fed is effectively fighting stimulative fiscal policy that would reheat the economy and inflation if rates aren’t kept at current higher levels.”

Analysts also believe labor market and growth indicators suggest maintaining rates. They explain that the Atlanta Fed’s GDPNow model forecasts 2.2% real GDP growth for Q2, consistent with the previous year’s trajectory, while the economy’s strong performance in services and high-tech sectors reduces sensitivity to higher interest rates.

Lastly, the risk of financial market reactions to rate cuts is significant, according to the firm. They warn, “Preemptive interest-rate cuts would expand Tech sector valuations further and invite a late-1990s-style melt-up of the stock market broadly.”

With a healthy economy, moderating inflation, and a stable labor market, the firm concludes that the Fed should keep the federal funds rate steady through the remainder of the year.