Ed Yardeni on CNBC.
The Fed can take the rest of 2023 off, according to market veteran Ed Yardeni.
That’s because inflation is falling, which means the Fed has room to back off of rate hikes.
The US may be able to avoid a recession after all as the economy enters a “rolling recovery,” he added.
The central bank can take the rest of the year off. Inflation is dropping, and there’s no sign that the economy will tip into the recession investors have fretted about, according to Ed Yardeni.
The Yardeni Research president pointed to signs of cooling inflation in the economy, with prices accelerating just 3.2% year-over-year in July, according to the latest Consumer Price Index report.
That’s slightly higher than the inflation reading in June, when prices acceleration 3% year-per-year. But if shelter prices were excluded from the July CPI, inflation has already back down to 2%, Yardeni said. If shelter, food, and energy prices were excluded, inflation has already cooled to 2.5%, not far away from the Fed’s long-run inflation target, he said.
Food and energy prices are known to be volatile components of the CPI, which is why they’re excluded in core inflation measures. And shelter inflation has shown signs of falling in recent months, which will eventually reflect in the official inflation statistics, Yardeni said.
Cooler inflation is good news for the economy and for stocks. Fed officials have raised interest rates 525 basis-points over the past year to tame high prices, which has also weighed on asset prices.
Markets are now pricing in an 89% chance that the Fed will keep interest rates level at its September policy meeting, according to the CME FedWatch tool, which could potentially spark a rally in the stock market.
A pause in rates is also good news for the US recession outlook, as high rates threaten to overtighten financial conditions and tip the economy into a downturn.
“I don’t think we’re going to go into a recession. I think we’ve been in a rolling recession, hitting different industries at different times, and now I think we’re seeing something like a rolling recovery,” Yardeni said.
Still, financial conditions are tight, which means the risk of a recession hasn’t been completely slashed. Tight credit conditions will also hinder economic growth, Yardeni added. He forecasted the S&P 500 would end the year at 4,600, implying just a 3% increase from current levels.