Strong Jobs Report Impacts Interest Rate Expectations

Investing.com – Last week’s strong jobs report has diminished expectations for another significant interest rate cut by the US Federal Reserve this year, and Yardeni Research warns that the reduction made in September may be the final one for the 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 noted in a report dated October 7.

They added, “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 previous instances when the Fed began cutting the funds rate, additional cuts followed in quick succession. However, Yardeni highlights that this time is different. There is no credit crisis, credit crunch, or recession underway. Rather, the economy is growing steadily at a rate of approximately 3.0% year-over-year. Thus, the Fed may not feel compelled to ease further, especially if the economy continues to thrive.

Furthermore, should the consensus shift back to higher-for-longer rates, it would be driven by better-than-expected economic performance and earnings. Yardeni Research suggests this narrative could favor the S&P 500 over SMidCaps because the former’s forward earnings are more positively impacted by a better economy than the latter’s.