The Federal Reserve is widely expected to cut interest rates by 25 basis points during its Dec. 18 meeting, with fed funds futures pricing in a nearly 90% chance of the move.

Not all voices in the financial world are cheering for lower rates.

Ed Yardeni, a veteran Wall Street investor, argues the Fed is on the brink of a policy misstep that could overheat the economy and spark market instability as we head into 2025.

Yardeni Asks The Fed Not To Cut Any Further

In a post shared Tuesday, Yardeni made his stance crystal clear: "Our recommendation to the Fed is to stand pat at the Dec. 17-18 FOMC meeting."

According to Yardeni, the Fed has already slashed the federal funds rate aggressively this year, and further easing risks fueling inflation and stock market euphoria.

"The reasoning for a 25bps cut on December 18 might simply be because markets expect one," he said.

Yardeni warned this could conflict with the central bank’s dual mandate of stable prices and full employment, as inflation remains sticky while the labor market continues to show strength.

Inflation Stubbornly High, Labor Market Sturdy

Key economic indicators underscore Yardeni's concerns.

"Inflation is too high, real GDP growth is strong, and the labor market is near full employment," Yardeni said.

The November employment report, released last week, shattered doubts about the labor market's resilience. Nonfarm payrolls outperformed expectations, reinforcing the notion that the summer slowdown was a mere blip.

Meanwhile, inflation is refusing to cool. November's Consumer Price Index report, due this week, is expected to reveal inflation still hovering uncomfortably above the Fed's 2% target.

Supercore CPI, which excludes shelter and focuses on services, sits above 4.5% year-over-year, while nominal wage growth holds at 4%.

Adding fuel to the fire, the National Federation of Independent Business small business survey reported that plans to raise worker compensation jumped from 18% in July to 28% in November. With wage pressures rising, Yardeni is skeptical inflation will retreat any time soon.

Stock Market Euphoria And The Risks of Overheating

Yardeni cautioned further rate cuts could exacerbate the stock market's meteoric rise, creating conditions for a correction early next year.

The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, has already soared more than 26% year-to-date, buoyed by optimism surrounding dovish Fed policies coupled with economic strength.

"We suspected as much when we raised the odds of a stock market melt-up following the Fed's 50bps cut in September," Yardeni said.

This prediction appears to have materialized as long-term bonds sold off and yields surged, signaling bond market discomfort with excessive easing.

What's Next For Powell And The Fed?

At November's Federal Open Market Committee meeting, Fed Chair Jerome Powell indicated the challenges of modeling fiscal policies under the new administration, including tax cuts and tariffs.

Yardeni argues these fiscal measures are likely at odds with further monetary easing given economic conditions.

The FOMC's blackout period prevents officials from offering public guidance ahead of this week's CPI data release.

Yardeni suspects Powell, who turned dovish at August's Jackson Hole conference, will likely proceed with the 25bps cut while emphasizing data dependency in his post-meeting remarks.

"Will the Fed wake up to the economic realities or will the elusive neutral-rate fantasy continue to guide monetary policy? We shall see," Yardeni said, summing up his skepticism.

The central question now is whether Powell and the Fed will heed these warnings or whether December's rate cut could pave the way for an economic overheating and market turbulence in 2025.

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