Fed Will Be On Hold This Year, EY's Daco Says

Summary

Gregory Daco, chief economist at EY-Parthenon, expects the Federal Reserve to keep interest rates unchanged for the rest of the year, citing disinflationary currents, past peak tariffs, lower energy passthrough, and a non-inflationary labor market. He discusses the cryptic testimony of new Fed Chair Kevin Warsh and the credibility risk of not acting on inflation, while noting that tightening would fail to curb AI-driven investment and instead harm other sectors. Daco also highlights the disconnect between tight real-economy conditions and buoyant equity markets.

• Fed expected to hold rates steady all year despite potential dissents.
• Disinflationary forces include easing tariff pressures and lower energy price effects.
• Labor market not a source of inflation with wage growth trending down toward 3.5%.
• Fed Chair Warsh's testimony avoided clear inflation views, raising credibility concerns.
• Tightening would not slow AI investment but would harm other sectors, posing a policy trade-off.
• Equity market momentum signals loose financial conditions despite real-economy tightness.