Veteran Wall Street strategist Ed Yardeni believes the Federal Reserve will raise interest rates, noting that the bond market is already sending a clear signal that the central bank is falling behind on inflation.
In a new CNBC interview, Yardeni predicts that the path forward for the Fed will begin with a shift in posture at the June meeting before following through with an actual rate hike.
“I think the reason bond yields have gone up is because the perception is that the Fed is behind the curve on inflation. The Fed has to clearly show that they’re dropping their easing bias and move not to a neutral bias, but move to a tightening bias at the June meeting coming up in a few weeks. And then after that, I think they have to follow up and actually show that they’re willing to raise rates and do it by 25 basis points.”
Yardeni says the two-year Treasury yield is already telling the Fed what it needs to do, and that the signal is historically reliable.
“The two-year is now indicating that the federal funds rate is too low. The federal funds rate range is 3.5% to 3.75%. The two-year is at 4.1%. And it’s a pretty good leading indicator of what the Fed should do. Very often it gets it right.”
On what a rate hike means for equity investors, Yardeni says the stock market is more resilient than most people fear, but he points to a specific level in the bond market as the key threshold to watch.
“I think the stock market can handle a rate rise. The bond market right now is at 4.6%. It’s sort of at a critical level. If it goes higher than that, then I think the next stop is going to be somewhere around 4.75%. I don’t think we’re going to go to 5%, and I don’t think these are the kind of rates that are going to really create a problem for the economy to grow and for earnings to grow. So I see earnings continue to do well.”
While Yardeni sees credit conditions tightening, he believes they are unlikely to derail the broader market thesis.
“I think we are going to see some tightening in credit conditions here because of the inflation issue. And I don’t think that’s going to create a real big problem for the valuation multiple either. I think the market’s still very much focused on the very futuristic developments that are happening now in the whole AI field.”
Photo by Joshua Hoehne on Unsplash
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