The U.S. Economy Doesn’t Need Much Help from the Fed to Continue Growing: Yardeni

Investing.com — Recent concerns regarding a possible economic slowdown have sparked significant discussion, yet Yardeni Research presents a persuasive alternative viewpoint.

According to analysts at Yardeni, the U.S. economy demonstrates resilience that counters prevailing worries, suggesting that intervention from the Federal Reserve may not be necessary to maintain growth.

“The latest labor market indicators have triggered a temporary ‘growth scare,’ in our opinion,” the analysts noted. These sentiments, driven by some lackluster labor market data, can be somewhat misleading. Despite these apprehensions, the overall economic landscape—particularly in the labor market—remains strong.

While recent payroll and household surveys indicate some vulnerabilities, they also highlight robust employment gains in sectors such as healthcare, leisure, and construction.

A detailed examination of the labor market shows it continues to exhibit strength, even if some headline figures seem weaker. For instance, average weekly hours worked increased by 0.3% in August, contributing to a 0.4% rise in aggregate weekly hours. This suggests that real GDP growth could possibly exceed 3% annually, assuming productivity maintains its recent upward momentum.

Yardeni Research anticipates that productivity growth, which has been strong since the third quarter of 2023, will remain a significant driver of economic expansion, reducing the need for major intervention by the Federal Reserve.

Currently, market expectations lean heavily towards multiple rate cuts by the Fed in the near future, with forecasts ranging from six to nine 25-basis-point reductions over the coming year. This outlook reflects concerns about a potential recession and a conventional Fed response to such situations.

“Since the summer, we’ve been predicting one rate cut in September for the rest of this year and maybe two to four cuts in 2025,” the analysts stated. However, they assert that aggressive easing may not be crucial for sustaining economic growth.

Yardeni’s skepticism regarding the necessity of monetary easing stems from their belief that the Federal Reserve has already achieved its inflation targets. Recent comments from Federal Reserve Chairman Jerome Powell acknowledged that inflation is close to the Fed’s 2% goal, indicating some potential for policy easing.

Nevertheless, Yardeni Research remains doubtful that additional assistance from the Fed is critical for ongoing economic growth. They suggest that easing monetary policy could inadvertently fuel stronger economic performance through enhanced productivity rather than through increased employment.

The labor market data reveals several positive trends that challenge the narrative of a slowdown. Industries such as ambulatory healthcare, construction, and financial activities achieved record employment levels in August.

“Average hourly earnings increased by 0.4% in August, raising our Earned Income Proxy for private-industry wages and salaries in personal income by 0.8% to a record high last month,” the analysts reported.

Regarding the dynamics of the yield curve, Yardeni notes that while the curve has recently disinverted—something historically associated with recessions—this does not necessarily indicate an impending downturn. They argue that the U.S. economy is robust enough to withstand such trends, particularly with the Fed prepared to lower rates as a precaution against potential downturns.

The bond market’s response to softer employment data further bolsters Yardeni’s optimistic perspective on the economy.