Wall Street veteran Yardeni: If the 2% inflation target is maintained, the Federal Reserve may continue to raise interest rates.

Kevin Warsh, the new Chairman of the Federal Reserve, sent hawkish signals during his first press conference, catching the market off guard and suddenly changing external expectations for interest rates. Veteran market strategist Ed Yardeni warned that if the Fed is truly committed to bringing inflation back to the 2% target, rate hikes may be inevitable.

The Fed kept interest rates unchanged on Wednesday, but Warsh appeared with a strong stance at the subsequent press conference, emphasizing very low tolerance for inflation. As a result, U.S. stocks fell, short-term U.S. Treasury yields surged, and the market began to reprice for higher policy uncertainty.

In an interview with Bloomberg TV, Yardeni said Warsh made it clear that the Fed has not achieved the 2% inflation target for more than five years. "If you don’t raise rates, how will you do it? So I think the market’s reaction now is correct." He also pointed out that even if rates are raised by 25 or 50 basis points, it may not be a big deal — the bond market could even rebound as a result.

Warsh's Hawkish Debut Shakes the Market

Warsh’s statements at the press conference took investors by surprise. He frequently mentioned "inflation" and "price stability," while noticeably paying less attention to the labor market, indicating a clear shift in policy priorities toward controlling inflation.

Yardeni observed that Warsh’s commitment to the 2% inflation target was unequivocal and resolute. Meanwhile, Warsh’s decision not to participate in the dot plot forecasts deprived the market of an important policy signal, further increasing uncertainty about the outlook.

The immediate reaction in U.S. stock and short-term Treasury yields confirmed the market’s sensitivity to this hawkish stance.

Yardeni: Warsh Returns to "Old Self"

Yardeni likened Warsh’s style to former Fed Chairman Alan Greenspan, describing it as "not very informative, full of ambiguity, with occasional surprises."

He believes that Warsh may have initially sent dovish signals to President Trump when first taking office, but has now quickly reverted to his "old Warsh" persona, putting price stability first.

Yardeni pointed out that Warsh has long criticized the Fed’s forecasting ability and communication style; his refusal to participate in the dot plot continues this stance, adding greater challenges for the market in interpreting policy direction.

Lower Oil Prices May Bring Warsh "Good Luck"

Despite issuing rate hike warnings, Yardeni also highlighted a variable that could spare the Fed from action: oil prices.

He pointed out that gasoline prices have recently been dropping, which may significantly bring down overall inflation. A temporary ceasefire deal in the Middle East this week could further lower oil prices, cooling consumer price increases.

Yardeni said, Warsh might "get lucky" and see inflation drop naturally without needing to use the rate hike tool. But he also emphasized that if inflation remains stubborn, modest rate hikes may not hit the market as hard as people fear — the bond market could even interpret it as a positive signal and respond accordingly.

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