Published August 29, 2025
In a recent article, long-time market analyst Ed Yardeni shares a list of reasons why the Federal Reserve should go slow in lowering interest rates:
“The S&P 500 SPX has now registered its 20th record closing high of the year. Nvidia’s results this week were navigated with little fuss, all but bringing a supportive second-quarter corporate earnings season to an end.
Another prop for the market is hope for easier monetary policy. Futures are pricing in an 85% chance the Federal Reserve will cut interest rates by 25 basis points in September.
Yardeni Research says lowering official borrowing costs will help the stock market rise further “as valuation multiples continue to melt up.”
However, Mr. Yardeni warns that the Fed will be stimulating an economy, which doesn’t require such largesse.
He backs up his call with a number of observations. First, consider the labor market. Thursday’s initial jobless claims report showed that layoffs remain low. In addition, Yardeni notes that the duration of unemployment may be stabilizing, as suggested by the decline in continuing claims.
Thursday also saw the latest revision to U.S. second-quarter GDP, which was nudged up by 0.3 percentage points to 3.3% on a seasonally-adjusted annual rate. “Even more impressive is that real gross domestic income (GDI) increased 4.8%. Both GDP and GDI rose to record highs during Q2,” says Yardeni.
Next, consider corporate health. “Corporate cash flow remained at a record high of $4.0 trillion during Q2. That is helping to boost capital spending, especially on information technology,” he notes.
This week also saw the Citigroup economic surprise index jump to 26.8. That’s not conducive to concerns about an economic downturn.
And directly pertinent to the inflation side of the Fed’s mandate are recent regional business surveys conducted by five of its 12 district banks, which showed price pressures are building. The average of the prices-paid indexes jumped in August to 56.0, the highest reading since October 2022, according to Yardeni.
“The average of the prices-received indexes is lower at 24.5, suggesting that many companies are absorbing the increasing costs of tariffs and/or offsetting them with productivity gains. More companies may start to pass their costs on to consumers in the coming months,” she says.
But here’s the final kicker; cutting interest rates will boost a stock market that is already making investors richer.
“We think the bull market is having a significant positive wealth effect on consumers who own equities, more than offsetting the debt effect on them of rising credit delinquencies,” says Yradeni.
He notes that a recent Gallup poll showed that 62% of Americans were invested in the stock market at the end of 2024 — the highest since the end of 2008.
At the end of the first quarter of this year, U.S. households owned $46.7 trillion in equities and mutual fund shares , according to Yardeni. “The baby boomers held 54% of that total. They are the richest retiring generation in history, with a combined net worth of over $82 trillion. They will spend more of their retirement assets and transfer a larger portion of these assets to their children,” he says.
And as the market rises they get richer still. “The positive wealth effect will continue to stimulate the economy, which doesn’t really need to be stimulated,” says Yardeni.”
Market Update
The prior Friday’s Fed-induced rally had investors feeling quite bullish coming into this week. The focus for investors this week would be Nvidia’s earnings report Wednesday night. Monday found investors stepping back a touch after Friday’s rally with the S&P 500 giving back -0.4%. Monday’s pullback was more noticeable in defensive sectors as the rotation into these groups ahead of the Fed meeting was unwound (a “sell the news” trade perhaps). Investors bought the slight dip Tuesday, however, to recoup Monday’s loss as Eli Lilly noted that its weight-loss drug has met targets and will proceed to the approval stage. The company’s shares rose +6% on the news. Wednesday saw the S&P 500 tick higher by +0.2% to a new record. Nvidia’s earnings after the close largely met expectations. But the results appeared to support other tech stocks as the Nasdaq rose +0.5% Thursday. GDP for the second quarter was revised a touch upward while the Atlanta Fed’s GDPNow forecast stands at a robust +3.5% for the third quarter. Friday’s report on “core” inflation appeared to give investors reason to pull back money from growth stocks ahead of the three day weekend. Stocks limped into the long weekend with the Nasdaq slipping -1.16%. Adding to the inflation concern was Caterpillar’s report that the company increased the projected impact of tariffs on its business to a whopping $1.5-1.8 billion for the year. The note sent the company’s shares down -4% Friday.
Friday’s dip kept the market averages largely flat on the week. The S&P 500 closed at -0.04% change from the prior week. The Nasdaq 100 (QQQ) dipped -0.27%. Small cap stocks, coming off their breakout the prior week, added +0.14%.
Warm wishes and until next week.