Is the 'higher-for-longer' narrative back, Yardeni asks

Last week’s strong jobs report has reduced expectations of another outsized interest rate cut by the US Federal Reserve this year, and Yardeni Research cautions that the reduction in September may be the last this year.

“Remember the ‘higher for longer’ mantra about the outlook for the federal funds rate during the spring? It turned into ‘lower and sooner’ this summer in response to the economy's soft patch,” analysts at Yardeni Research said, in a note dated Oct. 7. 

“After Friday's strong employment report, the consensus might pivot to ‘no rush to ease further’ during the fall. We can't rule out ‘higher for longer’ making a comeback this winter. We are in the none-and-done camp for the rest of this year.”

In the past, once the Fed started cutting the Fed funds rate, it was followed by a quick succession of additional rate cuts. 

However, the difference this time is that there's no credit crisis, credit crunch, or recession, Yardeni noted. Instead, the economy continues to grow at a solid pace around 3.0% on a y/y basis. So there's no rush for the Fed to ease, especially if the economy continues performing well.

Additionally, if the new consensus narrative shifts back toward higher-for-longer interest rates, that will be because the economy continues to perform better than expected, and so will earnings. 

“If so, that shift should favor the S&P 500 relative to the SMidCaps because the former's forward earnings is benefiting more from a better economy than are the latter,” Yardeni Research.

 

Source: Investing.com