In the face of rising global yields and fiscal deficits, Waller can only adopt a hawkish stance to appease the "bond vigilantes," hoping to lower long-term real rates through a reduction in inflation premiums, which aligns with the interests of the White House.

Written by: Zhang Yaqi

Source: Wall Street Journal

Renowned market strategist Ed Yardeni warned that if the Federal Reserve does not actively pivot at the June meeting, it risks losing control over borrowing costs—the bond market has already acted first, and the window for monetary authorities is narrowing.

Ed Yardeni, president and chief investment strategist of Yardeni Research, stated in the latest research report that the Fed’s current accommodative stance is "no longer suitable" for the current market environment and should be lifted at the June meeting. He wrote: "If the Fed fails to remove the accommodative stance, investors will conclude that the central bank is behind the inflation curve and will demand a higher inflation risk premium." He expects the Fed to maintain interest rates at the June meeting and shift to a tightening policy stance.

The bond market has already priced this in. Traders currently expect the Fed to raise rates in March next year, with about a three-quarters probability pricing in a rate hike before December this year. In this context, the yield on 30-year U.S. Treasuries has surpassed 5%, approaching the highest level since 2007, while the 10-year benchmark yield further rose by 3 basis points to 4.63% during the Asian trading session on Monday.

The Accommodative Stance Is "No Longer Timely"

According to Bloomberg, Ed Yardeni explicitly called for the Fed to abandon its accommodative stance at the Federal Open Market Committee meeting on June 16-17 in his research report. He pointed out that if the central bank is slow to act, investors will determine that it is behind the inflation situation, which will lead to a demand for a higher inflation risk premium, ultimately pushing long-term rates higher and causing the Fed to lose control over borrowing costs.

Yardeni also noted in another report that if the 10-year Treasury yield rises further, it may peak in the 4.75% to 5% range in the coming weeks. He believes that "it will be a good buying opportunity for bonds and stocks at that time."

Ed Yardeni is the creator of the term "bond vigilantes" to describe investors who protest government policies by selling off Treasuries. He is also an advocate of the "Roaring 2020s" market theme, believing that advancements in technology and productivity will drive sustained economic prosperity. His year-end target for the S&P 500 index is 8,250 points, the highest forecast among strategists tracked by Bloomberg.

Concerns about inflation leading to rising rates are not unique to the U.S. Yardeni pointed out that yields are rising in Europe and Japan, weakening the motivation for foreign funds to purchase U.S. Treasuries, forcing the U.S. government to pay a higher price to compete for buyers amid high fiscal deficits and persistent inflation risks.

Bloomberg market strategist Mark Cranfield commented, "A 5% long bond yield is not only failing to attract value buyers but is also encouraging bond bears, reigniting the vigilante mentality."

Wall Street Titans Reach Consensus

Yardeni's concerns are not isolated. DoubleLine Capital CEO Jeffrey Gundlach and Pimco Chief Investment Officer Dan Ivascyn share a similar view, believing that the Fed may have to delay rate cuts or even pivot to rate hikes.

In an interview with Fox News, Gundlach stated, "With a two-year Treasury yield nearly 50 basis points higher than the federal funds rate, a rate cut is simply impossible in my view."

The aforementioned market pressures are now concentrating on Waller, who is set to be the new Fed chair. He will preside over the Federal Open Market Committee meeting on June 16-17 for the first time, where investors expect rates to remain high, even as President Trump continues to call for lower borrowing costs.

Yardeni proposed a rather counterintuitive logic: a more hawkish Waller than the market expects may actually align with the interests of the Trump administration. He wrote in his report: "By adopting a hawkish stance, Waller may 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 will improve, and Trump can tout the decline in long-term yields as an economic victory."