Fed needs to pause rate hikes to stabilize battered market, Ed Yardeni says

  • The Fed can reverse the market decline by backing off its interest rate policy, veteran investment strategist Ed Yardeni says.
  • He sees strong economic fundamentals supporting earnings growth through next year.

The stock market is on pace for its worst October since the financial crisis.

But the Federal Reserve can reverse the damage by stepping away from its current interest rate hike policy, according to veteran investment strategist Ed Yardeni.

"We need the Fed to pause here and just take a breather," the Yardeni Research President said Friday on CNBC's "Trading Nation. "Let's see how the economy plays out, and that will help the stock market a lot."

His thoughts came as the market took investors on a volatile ride. The S&P 500 dropped almost 4 percent last week. In October alone, the index is off 8.5 percent. Meanwhile, the Dow is down more than 6 percent for the month.

Yardeni, who ran investment strategy for Prudential and Deutsche Bank, is not letting the market turmoil derail his long-term bull case for stocks. He sees strong economic fundamentals supporting earnings growth through next year.

"I don't expect a recession any time soon," Yardeni added.

He suggests an overzealous Fed may be the main source of Wall Street anxiety right now. There's a belief that the Fed may raise interest rates too aggressively and seriously disrupt the economy and markets.

"Fed officials have been talking like mission accomplished — that it's the best economy that we've ever had," he said. "If it's the best economy that we ever had, why raise interest rates? Why not leave it be if it's growing with low inflation?"

Regardless of what the Fed ends up doing, Yardeni predicts the outcome of the Nov. 6 midterm elections will take some uncertainty out of the market. He also believes a strong holiday season will inject some cheer into the market.

"I think it's going to be the best retail season we've ever had. Consumers are really in very good shape," Yardeni said. "That should help to turn the market around."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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