The economy's two most important engines of economic growth, consumer spending and business investment, are booming. Meanwhile, financial markets are siding with the more hawkish Federal Reserve policymaker camp. The 2-year US Treasury note yield remains well above the federal funds rate, observes Ed Yardeni, editor of Yardeni QuickTakes.
In Q2 2026 real GDP, consumption expenditures increased 3.3% at a seasonally adjusted annual rate and nonresidential fixed investments jumped 8.4%. The headline and core GDP deflators, the most comprehensive measures of economy-wide inflation, rose 4.3% and 3.8% year-over-year. Fed officials should be turning hawkish.
(Editor’s Note: Ed will be speaking at the 2026 MoneyShow Masters Symposium San Francisco, scheduled for Aug. 25-28. Click HERE to register.)
Recent Q2 earnings reports were also upbeat on consumers. Plus, Bank of America Corp. (BAC) expects hyperscaler capital expenditures to reach $860 billion this year and approach $1.2 trillion in 2027. The AI buildout has turned into its own stimulus program for the economy. And, of course, the government deficit remains very stimulative.
Fed officials appear to be dividing into two camps. One camp views rate hikes as necessary only if inflation fails to fall closer to 2%. The other camp wants to hike the federal funds rate sooner rather than later. They include the three dissenters at the Fed’s July meeting. Recent comments from Minneapolis Fed President Neel Kashkari (one of the dissenters) and Kansas City Fed President Jeff Schmid reflect this hawkish view. The interest rate markets seem to agree with them.
