Is the ‘Higher-for-Longer’ Narrative Making a Comeback, Yardeni Questions

Last week’s robust jobs report has led to a decrease in expectations for another significant interest rate cut by the US Federal Reserve this year. Analysts at Yardeni Research caution that the anticipated reduction in September may be the final cut for 2023.

Yardeni analysts recalled the earlier outlook for the federal funds rate, which had shifted from a ‘higher for longer’ perspective in the spring to a ‘lower and sooner’ view during the summer due to a slowdown in the economy. Following the recent strong employment report, they suggest that the consensus may now pivot towards a ‘no rush to ease further’ stance this fall. They also warn that the ‘higher for longer’ narrative could resurface in the winter, indicating that the likelihood of further cuts this year is low.

Historically, once the Fed begins to reduce the Fed funds rate, it usually follows up with a series of additional cuts. However, this time around, the landscape is different, as there is no credit crisis, credit crunch, or recession in sight. The economy appears to be growing steadily at approximately 3.0% year-over-year, which reduces the urgency for the Fed to implement further easing, particularly if the economy continues to perform well.

Moreover, if the prevailing narrative shifts back to expectations of higher-for-longer interest rates, it would likely be due to the economy exceeding expectations, which would also positively impact corporate earnings. Such a shift is expected to favor large-cap stocks over small and mid-cap stocks, as larger companies are projected to benefit more from a stronger economic environment.