Wall Street Reconsiders Fed’s Half-Point Rate Cut as Inflation Concerns Resurface

Wall Street's optimism over the Federal Reserve’s recent half-point rate cut is fading, with analysts raising concerns about potential inflation risks after a robust jobs report. Many now suggest the central bank may need to reconsider further cuts to avoid overheating an already strong economy.

Wall Street Analysts Raise Concerns Over Further Fed Rate Cuts Amid Strong Jobs Data and Inflation Risks

Wall Street celebrated the Federal Reserve's half-point rate reduction last month by sending stocks to new record highs. However, the blockbuster jobs report on October 4 has prompted doubts to creep in.

Bank of America and JPMorgan analysts, among the few banks that accurately forecasted the half-point cut last month revised their projections for November's policy meeting. They now anticipate a quarter-point reduction rather than an additional 50 basis points.

Nevertheless, other Wall Street analysts have cautioned that the central bank should exercise even greater caution in light of the circumstances, as additional easing could potentially re-inflate an already robust economy, thereby threatening to escalate inflation.

For example, seasoned market prognosticator Ed Yardeni stated in a recent interview with Bloomberg that the previous half-point reduction was excessive and that no further cuts are required. He also said, "I presume several Fed officials regret doing so much."

Ian Lyngen, the head of U.S. rates strategy at BMO Capital Markets, anticipates a quarter-point reduction in interest rates next month. However, he cautioned that the Federal Reserve may delay further easing if the upcoming employment report and inflation data are exceedingly hot.

“If anything, the employment update suggests that the Fed might be revisiting the prudence of cutting in November at all—although a pause is not our base case,” he wrote in a note.

Former Fed Officials and Economists Warn Against Further Rate Cuts Amid Inflation and Wage Growth Concerns

On October 4, Lawrence Lindsey, a former Federal Reserve official who also served as director of the National Economic Council during the George W. Bush administration, stated on CNBC that policymakers should reflect that a rise followed their rate cut in the 10-year Treasury yield. He suggested this could be a sign that they are doing something incorrectly.

“So my suspicion is that they’re probably going to have to pass at the next meeting,” he added.

He cautioned that additional rate cuts would confirm the expectations for persistent inflation that are the foundation of employees' demands for substantial wage increases at Boeing and East Coast ports.

Mohamed El-Erian, a prominent economist, stated that "inflation is not dead" and that the Federal Reserve should prioritize the job market and price stability over solely sustaining full employment.

Similarly, former Treasury Secretary Larry Summers posted on X that nominal wage growth, a critical factor in inflation, is not slowing down. He also stated that the jobs report indicates that further rate cuts necessitate a cautious approach.

“With the benefit of hindsight, the 50-basis point cut in September was a mistake, though not one of great consequence,” he wrote. “With this data, ‘no landing’ as well as ‘hard landing’ is a risk the @federalreserve has to reckon with.”

Torsten Sløk, Apollo's chief economist, stated in a note on October 5 that additional Fed cuts are unnecessary. He cited the robust economy, low rates consumers had previously secured, fiscal spending, and AI-related business investment. Sløk has been unwavering in his belief that rates will remain elevated for an extended period.

Other data indicated that the Federal Reserve's rate cut last month had already had a substantial effect, even before the employment report.

For instance, the services activity index for September from the Institute for Supply Management exceeded expectations.

“Businesses are already starting to see activity and orders rebound as the Fed takes their foot off of the brake,” Comerica chief economist Bill Adams said in a note on October 3.