Yardeni explains why the Fed should be turning more hawkish

Investing.com -- Yardeni Research argued in a note Thursday that the U.S. economy is on solid footing and that Federal Reserve officials should be adopting a more hawkish stance, as upside inflation risks outweigh downside risks to growth.

The firm said the economy’s two most important engines, consumer spending and business investment, "are booming."

They noted that in the second quarter, real consumption rose 3.3% and nonresidential fixed investment jumped 8.4%, while the headline and core GDP deflators climbed 4.3% and 3.8% year over year. On that basis, Yardeni said, "Fed officials should be turning hawkish."

Yardeni noted the AI buildout "has turned into its own stimulus program for the economy," citing Bank of America’s expectation that hyperscaler capital expenditures reach $860 billion this year and approach $1.2 trillion in 2027, alongside a still-stimulative government deficit.

The firm said Fed officials appear to be splitting into two camps, one viewing hikes as necessary only if inflation fails to fall toward 2%, and another wanting to move sooner.

It cited hawkish comments from Minneapolis Fed President Neel Kashkari, who said additional hikes this year are "not impossible," and Kansas City’s Jeff Schmid, who argued inflation will "require tighter policy." Yardeni said financial markets are siding with the hawks, with the 2-year Treasury yield well above the funds rate.

Yardeni pointed to firm services activity, with the PMI edging up to 54.1 and hot prices-paid readings, though it acknowledged a softer July ADP report, which showed 44,000 private jobs added, "did not get confirmed" by its jobs-growth scenario.

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