Good morning. No one thinks the Federal Reserve is going to cut rates today; CME Group puts the options-implied odds of a cut at 2 per cent. This is as it should be. Inflation is still above target and the rate of disinflation is slowing down. Certain key categories of prices are actually rising. Tariff inflation is just starting to blossom. The labour market is (mostly) strong. Economic growth is (mostly) solid. Second-quarter corporate earnings are coming in pretty well so far. Financial conditions, led by exuberant markets, are growing looser. Best to wait until September. Of course, the president says rates should be much lower. If he really believes that (and there is reason to doubt it), he’s wrong. If you think we’re wrong, email us: unhedged@ft.com.

Valuation and bubbles

Yesterday I wrote that “the historical correlation between very high valuations (and other frothy phenomena) and poor long-term returns is about as solid as any relationship in finance”. It strikes me that it is worth emphasising just how much work “long-term” is doing in that sentence.

Consider the equity risk premium. Robert Shiller of Yale’s version of the ERP, which he calls “excess Cape yield”, is the earnings yield on the S&P 500 (that is, earnings/price, using 10-year average earnings) minus the 10-year bond yield. It is an OK predictor of real excess returns (that is, real stock returns minus real Treasury bond returns) over the subsequent decade: