Inside economic factors moving the stock market

Key Concepts Federal Reserve (Fed), Core PCE (Personal Consumption Expenditures), Real GDP (Gross Domestic Product), Unemployment Rate, Tariffs, Durable Goods Inflation, Birth-Death Model, T-Bills (Treasury Bills), Quantitative Easing (QE), Reserve Management Purchases, Neutral Rate, Dot Plots, Fiscal Policy, Phillips Curve, Productivity-led Growth, Roaring 2020s.

Federal Reserve's Economic Assumptions and Inflation Outlook

The discussion begins with Ed Yardeni's assertion that the Federal Reserve is "well positioned to do nothing for a while" following recent adjustments to its economic assumptions. The Fed made "big changes" in its outlook for Real GDP, Unemployment, and Inflation.

Regarding inflation, Fed Chair Powell noted that Core PCE is projected to come down to 2.5% from 3.0%. Ed Yardeni agrees with Powell's assessment that this inflation will be "transitory." He attributes the current elevated inflation, which prevents it from being at the 2% target now, to tariffs, specifically noting that "durable goods inflation has picked up coincident with the tariffs." Yardeni anticipates that inflation should be "back down to 2%" by sometime next year, which he believes justified the Fed's recent quarter-point rate cut.

Jobs Market and Employment Data Reliability

The conversation shifts to the employment front, where Powell stated that the U.S. has averaged 40,000 jobs since April. However, the actual number "could be closer to a loss of 20,000 jobs," with new data expected on Tuesday.

Ed Yardeni highlights the difficulty in modeling job data due to "frequent revisions." He specifically mentions the Birth-Death Model, which attempts to estimate job creation and destruction from small businesses. Yardeni describes this data as "very questionable" on a preliminary basis. He concludes that there's "no doubt that employment has slowed," but suggests that this slowdown is due to "various reasons that probably, the Fed can't do much with lower interest rates to improve."

T-Bill Purchases and the QE Debate

A potentially controversial topic discussed is the Fed's temporary buying of $40 billion in T-Bills. The interviewer frames this as a debate: "one man's QE is another man's reserve management purchases."

Ed Yardeni, while initially humorous, clarifies his stance: "technically speaking," he doesn't believe it's Quantitative Easing (QE). However, "practically speaking, it does add liquidity to the reserve market," which he considers "a good thing." The markets, he notes, "seem to like this though."

Dissent within the Fed and Political Motivations

The discussion addresses the increasing dissent within the Federal Reserve, with "three, most since 2019." Powell made a significant comment that "with each step lower as they get to the neutral rate you're just going to lose support among a few more participates." He also emphasized the need for "data to motivate those participates that want to join in this case a majority cut."

When asked if this dissent stems from differing data interpretations or political motivations, Ed Yardeni expresses doubt about politics being "that big of a deal in the current situation," despite President Trump's public comments on the Fed. He observes from the dot plots that there has always been a range of opinions, and while Powell was previously successful in building consensus, "now not so much." Yardeni attributes this increased friction to the fact that "the Fed itself raised its outlook for Real GDP next year because fiscal policy will be very stimulative," providing "all the more reason not to cut anymore."

GDP Outlook and the "Roaring 2020s" Thesis

Finally, the conversation touches on the Fed's GDP outlook. Powell noted that the economy "doesn't feel like a hot economy" (referencing Phillips Curve-type inflation), yet the Fed did raise its GDP forecast for next year to 2.3%, which is described as "interesting and good." However, the interviewer points out that after next year, the GDP numbers "sort of go back down a little bit."

Ed Yardeni states he is "not on same page necessarily as you with the Roaring 20s" regarding the Fed's longer-term GDP projections. He firmly believes the Fed, not him, "should go back to the drawing board." He highlights that Powell himself "just mentioned the word productivity several types" and was "pretty enthusiastic about the strength of the economy, GDP." Yardeni notes that Powell "did allude to productivity-led growth," which is "exactly the thesis of the Roaring 2020s" – Yardeni's own optimistic forecast for strong economic growth driven by productivity gains.

Conclusion

The discussion provides a detailed look into the Federal Reserve's recent policy decisions and economic outlook, as interpreted by Ed Yardeni. Key takeaways include the belief that current inflation is transitory and tariff-driven, the inherent unreliability of preliminary job data, and the nuanced view of the Fed's T-bill purchases as liquidity management rather than full-blown QE. The increasing dissent within the Fed is attributed to differing data interpretations and the impact of stimulative fiscal policy. Yardeni maintains a more optimistic long-term economic outlook, rooted in his "Roaring 2020s" thesis, which emphasizes productivity-led growth, suggesting the Fed's longer-term GDP projections may be overly conservative given the underlying economic strength.