September US rate cut looks certain, inflation data holds the key: Ed Yardeni

As expectations build around the U.S. Federal Reserve’s next policy move, all eyes are on the scale of the September rate cut. Markets appear convinced a cut is inevitable, but whether it will be a modest 25 basis points or a sharper 50 basis points remains uncertain.

Speaking to ET Now, veteran economist Ed Yardeni cautioned that upcoming inflation data will be decisive.

“We are going to have to see, just wait a few days. On Wednesday and Thursday we are going to get the PPI and CPI for August. They could be on the hot side. If they are, then we are going to get 25 basis points. If they are not, and they are surprisingly cool, then we could possibly get 50 basis points. But the Fed has to be concerned about creating financial instability,” Yardeni said.


He further noted that lowering interest rates might not directly address America’s labor market constraints. “We have a shortage of workers because of restrictions on migration into the country and, of course, increasing deportations. There is really nothing lower interest rates are going to do to change that. On the other hand, lower rates could very well cause the market to rise faster, even in a melt-up situation, and that would not be a good thing,” he added.

Productivity surge amid growth concerns

While weaker job data has fueled some recession worries, Yardeni remains optimistic about the U.S. economy’s underlying strength.

“In the second quarter, we had a nice rebound in real GDP, revised upwards from 3% to 3.3%. We are currently running the third quarter around 3%, though that may get revised down after Friday’s employment report. Still, the economy is growing,” he said.

He added that the ongoing technological revolution is already paying dividends. “I think what we are seeing here is increasing productivity, and that is a good thing. The digital revolution, including AI, is already showing signs of boosting productivity. Productivity allows for faster growth… real purchasing power actually gets boosted by it. Productivity makes everything better and that explains why the stock market has been doing so well.”

India in focus amid global trade turmoil

Turning to emerging markets, Yardeni said India continues to hold strategic importance for the U.S., even amid ongoing trade turbulence.

“Trump's tariffs have created a lot of turmoil and uncertainty. It may take some time, but things do get straightened out. The geopolitical relationship between the United States and India is clearly very important, and it does not make sense for us to pursue a policy that alienates India and pushes it closer to Russia and China,” he observed.

Referring to Prime Minister Narendra Modi’s outreach to China, he noted Trump’s renewed efforts to keep ties with India intact. “If that is the case, then that is a positive for India. At least it is not a negative. That is really the issue. Maybe there will be a relief rally for a day or two, and then you get back to the fundamentals, which include the fact that India is not a cheap market, it has had a heck of a run,” Yardeni concluded.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)