Yardeni Sees September Rate Hike as Fed Seeks to Regain Inflation Credibility

Ed Yardeni, President of Yardeni Research, expects the Federal Reserve to raise interest rates by 25 basis points in September. He believes this move will help restore the central bank's credibility on inflation and aid in keeping it under control.

Yardeni dismisses concerns of stagflation in the US, saying domestic demand remains strong despite some weaker headline growth numbers. He attributes this to robust consumer and business investment demand as well as the AI boom, which has led to a surge in imports from countries such as South Korea, Taiwan, and Vietnam.

Yardeni also notes that while the GDP number may have been affected by the AI boom, domestic demand is growing at around 3%, significantly higher than the previously reported numbers. He suggests that the next consumption deflator reading will be an important indicator of whether the Fed needs to take further action and raise interest rates in December.

The Cleveland Fed has estimated that the August consumption deflator measure will be up 0.3%, keeping the year-over-year number above 3%. This could prompt the Fed to increase interest rates again, depending on how inflation and the bond market react.