Source: JinShi Data
Wall Street strategist and Yardeni Research president Ed Yardeni said that the general expectation is that the Federal Reserve will cut interest rates by 25 basis points this week, but this may be a bad idea.
"One of the things we've heard recently from Fed Chairman Powell is, 'The economy is strong, we don't need to rush to cut rates.' If that's the case, then why do something this week?" Yardeni asked on CNBC's "Squawk Box" on Monday morning.
Federal funds futures predict a 99% chance that the Federal Reserve will cut interest rates by another 25 basis points this week, while the probability of rates remaining at the current level is less than 1%.
Although the market generally expects the pace of rate cuts to slow down after that, Yardeni said that with the recent strong economic data, continued GDP growth, a healthy labor market, and record highs in stocks, gold and TRON, it may not be the best decision to continue cutting rates.
He pointed out that the inflation rate is still above the Federal Reserve's 2% target. Although the Federal Reserve has hinted that it may pause the rate cut cycle in January next year, Yardeni believes this action may come too late.
He had previously called in a report for U.S. policymakers to keep rates unchanged at the upcoming FOMC meeting and assess the economic situation. He said, "The committee should take time to see how the economy will evolve in the coming months after Trump's election victory."
However, Federal Reserve Chairman Powell had previously stated that policymakers "cannot (or will not) model the fiscal policy of the new government before it is implemented".
Although the impact of tariffs and tax cuts remains uncertain, the basic view is that given that inflation is still too high, with strong real GDP growth and the labor market close to full employment, it is likely to be at odds with a loose monetary policy.
Yardeni believes that the stock market may face some selling pressure next month, as investors will rebalance their portfolios or cash in on "huge" capital gains at the beginning of the new year.
"In my view, everything points to interest rates being at the right level," Yardeni added. He said that the Federal Reserve is now cutting rates at the risk of market inflation, which could lead to a "malicious adjustment".
