According to Yardeni Research, the Federal Reserve needs to catch up with the bond market's trajectory; otherwise, it risks losing control over borrowing costs as investors grow increasingly concerned about inflation.
The firm's President and Chief Investment Strategist, Ed Yardeni, stated that given the current market environment is "no longer" suitable for an accommodative policy, the Fed should eliminate its dovish bias at the June meeting.
"If the Fed does not remove it, investors will perceive the central bank as falling behind the inflation curve in its response, and will demand a higher inflation risk premium," Yardeni wrote in a report. "It is expected that the Fed will keep rates unchanged at the June meeting and shift to a tighter policy stance."
The swaps market currently anticipates the Fed will raise rates by 25 basis points by March. In contrast, before the outbreak of the war in Iran, expectations were for the Fed to cut rates more than twice by year-end, with each cut being 25 basis points. Yardeni's comments come as the yield on the 30-year U.S. Treasury has risen above 5%, nearing its highest level since 2007, while the policy-sensitive 2-year Treasury yield is also close to its highest level in 15 months.
Not only in the United States, but yields in major global markets such as Europe and Japan have also climbed, reflecting heightened market concerns about inflation. According to Yardeni, rising interest rates overseas are weakening a crucial long-standing source of demand for U.S. Treasuries, forcing the U.S. government to work harder to attract buyers amid substantial fiscal deficits and persistent inflationary pressures.
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