Ed Yardeni predicts it’ll be ‘one and done’ for Fed rate cuts despite Wall Street expectations

Yardeni, president of Yardeni Research, believes Jerome Powell and the Federal Open Market Committee will implement just one modest rate cut.

Expectations for a September cut were bolstered by a weak jobs report early in the month, with another reduction anticipated in December.

However, Yardeni downplays the jobs report—which initially spooked markets with recession fears—and cites consumer resilience as a reason to expect only a single rate cut this year.

“The markers are very dovish,” Yardeni told CNBC Monday. “Expectations are 25 to 50 basis points in the September meeting, I think there’s still expectations that maybe we’ll even have 100 basis points between now and year end.

“I think it’s going to be 25 basis points at the September meeting and I think it’s going to be one and done. The economy is just doing too well.

“I know that people got freaked out by the last employment report but I think a lot of that was weather, and some of the other indicators that came out kind of confirmed that.”

Siegel: “Data has come in stronger than I anticipated”

The Labor Department’s July job report showed a drop from the 179,000 jobs created in June. Forecasters had expected to see 175,000 jobs in July and instead saw a mere 114,000. The unemployment rate rose to 4.3% from 4.1%, prompting calls for an emergency rate cut to ensure the latter half of the Fed’s dual mandate.

But since then proponents for a significant cut have walked back their take, including the likes of Wharton professor Jeremy Siegel.

In his weekly commentary for investment specialists Wisdom Tree this week, the professor emeritus at the University of Pennsylvania admitted: “Certainly, the data has come in stronger than I (and many others) have anticipated. Particularly surprising was the drop in jobless claims, now nearer to the midpoint of my 200k to 240k range after breaching the upper limit.”

Professor Siegel maintains, however, that it is time for the base rate to come down, saying that, according to a raft of forward-looking policy rules, it should be below 4%.

That would represent a significant drop off from where rates currently sit: At a more than two-decade high between 5.25 and 5.5%.

Yardeni is unconvinced the data is cool enough to push Chair Powell and his colleagues to such lengths, adding: “If I’m correct … they’re going to get some indicators before the September FOMC meeting that suggests the economy’s alive and well, the labor market’s doing well and that inflation’s continuing to moderate.

“So I think 25 basis points is enough and I think that’s probably what Chair Powell will communicate. It’ll be dovish but not as dovish as the market is discounting.”

Cut expectations

Ever the optimists, analysts around the globe are still pricing in multiple cuts this year.

In a note seen by Fortune published earlier this month, Bank of America’s Claudio Irigoyen and Antonio Gabriel write: “Solid activity and mostly good news on inflation leaves us comfortable with our call for two 25bp cuts in 2024, in September and December. July retail sales came in stronger than expected. 

They are not alone in their take.

In its monthly update published yesterday Vanguard, an investment firm with $9.3 trillion in assets under management, wrote: “Recent data suggest that the labor market is softening, and the Federal Reserve appears to be taking notice. The Fed gave a strong signal in July that it was prepared to cut the federal funds rate target by 25 basis points in September.

“We are anticipating an additional second 25-basis-point cut this year and a target range of 3.25%–3.5% at the end of 2025.”

Goldman Sachs is even more dovish.

A Q&A with chief U.S. economist David Mericle shared yesterday revealed: “We expect an initial string of three consecutive 25bp cuts in September, November, and December, followed by quarterly rate cuts starting next year to a terminal rate of 3.25-3.5%. 

“We think the increase in the unemployment rate to date and other softer signs in the labor market are enough for the FOMC to accelerate the initial pace … but not enough to cut by 50bp.

“We see comments from Fed officials since the July employment report as consistent with our forecast of a 25bp cut in September. A weaker August employment report than we expect would be the most likely catalyst for a larger cut in September.”