Yardeni Research has raised doubts over whether recent interest rate cuts by the Federal Reserve can reverse slowing employment growth in the United States. The firm argues that the current economic backdrop is being driven by strong productivity gains and solid momentum, rather than weak demand.
In its latest analysis, Yardeni Research pointed out that real GDP expanded at an annualized rate of 4.3% in the third quarter, following a 3.8% increase in Q2, even as total hours worked remained flat. This divergence suggests a sharp improvement in productivity.
The firm estimates that productivity growth exceeded 3.5% over the past two quarters, a development consistent with its view of a productivity-driven “Roaring 2020s” economic environment.
Consumer activity has also remained resilient. Household spending rose 3.5% in the third quarter, accelerating from 2.5% in the previous quarter, despite the lack of growth in aggregate hours worked.
Corporate profitability has strengthened further, with profits from current production increasing by $166.1 billion on a seasonally adjusted annualized basis in Q3, reaching a new record high.
On the inflation front, Yardeni Research noted that the core personal consumption expenditures index rose at an annualized pace of 2.8%, while the year-over-year rate stood at 2.9%.
Rate cuts may not solve labor market challenges
Against this backdrop, the firm questioned the Federal Reserve’s decision to cut interest rates by 75 basis points since September, following aggressive easing late last year. Yardeni Research said policymakers appear increasingly focused on the slowdown in payroll employment growth.
The analysis highlighted December’s Consumer Confidence Index, which showed the share of respondents saying jobs are “hard to get” rising to 20.8%, reinforcing concerns about labor market conditions.
However, Yardeni Research argued that lower interest rates are unlikely to resolve the issue. The firm cited ongoing skills mismatches and the growing role of artificial intelligence, which is allowing companies to boost output without expanding headcount.
The report warned that continued monetary easing could instead inflate asset prices and slow progress toward the Federal Reserve’s 2% inflation target, concluding with a cautionary note: investors should “beware the reaction of the Bond Vigilantes.”
