"Super bull" Ed Yardeni: The Fed should abandon its dovish stance at the June meeting, or risk losing control over interest rates.

Renowned market strategist Ed Yardeni warns that if the Federal Reserve does not proactively shift its stance at the June meeting, it risks losing control over borrowing costs—the bond market has already taken the lead, and the window left for monetary authorities is narrowing.

Ed Yardeni, President and Chief Investment Strategist of Yardeni Research, states in his latest research report that the Fed’s current dovish stance is “no longer appropriate” in today’s market environment and should be revoked at the June meeting. He wrote: “If the Fed fails to remove its dovish stance, investors will conclude that the central bank is lagging behind the inflation curve and will demand a higher inflation risk premium.” He expects the Fed to keep rates unchanged at the June meeting and shift towards a more hawkish policy stance.

The bond market pricing is ahead of the Fed. Traders currently expect the Fed to raise interest rates in March next year, while the probability of a hike before December this year is about three-quarters. Against this backdrop, the 30-year U.S. Treasury yield has broken above 5%, approaching the highest level since 2007, and the 10-year benchmark yield further rose 3 basis points to 4.63% during Monday's Asian trading session.

Dovish Stance “No Longer Appropriate”

According to Bloomberg, Ed Yardeni specifically called on the Fed to abandon its dovish stance at the June 16-17 Federal Open Market Committee meeting in his report. He pointed out that if the central bank acts too slowly, investors will assume it is lagging behind inflation, demand a higher inflation risk premium, and ultimately push up long-end interest rates, causing the Fed to lose control over borrowing costs.

Yardeni also wrote in another report that if the 10-year Treasury yield rises further, it may peak in the 4.75%–5% range within the next few weeks. He believes, "That will be a good buying opportunity for bonds and stocks."

Ed Yardeni is the creator of the term “bond vigilantes,” referring to investors who protest government policy by selling government bonds. He is also an advocate for the "Roaring 2020s" market theme, believing that technology and productivity improvements will drive sustained economic prosperity. His year-end target for the S&P 500 Index is 8250 points, the highest forecast among strategists tracked by Bloomberg.

The rise in interest rates driven by inflation concerns is not unique to the U.S. Yardeni noted that yields have risen in Europe and Japan as well, reducing foreign funds' incentive to buy U.S. Treasuries. This forces the U.S. government to pay a higher price to attract global funds amid high fiscal deficits and persistent inflation risks.

Bloomberg market strategist Mark Cranfield commented: "The 5% long bond yield has not attracted value buyers but is instead encouraging bond shorts and reigniting the vigilante mentality."

Wall Street Leaders Reach Consensus

Yardeni's concerns are not isolated. DoubleLine Capital CEO Jeffrey Gundlach and Pimco CIO Dan Ivascyn share similar views, believing the Fed may be forced to delay rate cuts or even move to raise rates.

Gundlach said in a Fox News interview: "With the two-year Treasury yield nearly 50 basis points higher than the Fed funds rate, I see rate cuts as impossible."

This market pressure is concentrating on incoming Fed Chair Waller. He will preside over his first FOMC meeting on June 16-17, with investors expecting rates to remain high, despite President Trump’s ongoing calls to lower borrowing costs.

Yardeni put forward a somewhat counterintuitive logic: A more hawkish Waller than the market expects might actually align with the Trump administration's interests. He wrote: "By taking a hawkish stance, Waller might have the opportunity to achieve what the White House truly wants—lower borrowing costs in the real economy. Mortgage rates may decline, corporate financing conditions may improve, and Trump can tout a drop in long-term yields as an economic victory."

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