Is the Fed on the right track? Wall Street veteran Ed Yardeni says this is what it should do next

Published Thu, Sep 29 20228:45 PM EDT

The Federal Reserve's response to inflation is coming under intense scrutiny once more as investors grapple with a worsening economic outlook and a stock market that's now in bear market territory. Concerns are mounting that the U.S. economy is now paying the price for a Fed that has been caught far behind the curve. After initially characterizing pandemic-era inflation as "transitory," Fed Chair Jerome Powell eventually conceded in November last year that it's "probably a good time to retire that word." The central bank has raised its federal funds rate up to a range of 3% to 3.25% since March. Earlier this month, it signaled its intention to raise interest rates as high as 4.6% in 2023 to control inflation. The Fed's dot plot also showed that central bank officials expect to hike rates to 4.4% by the end of 2022. 'Too much too soon' Yet, despite the Fed raising its guidance, calls are growing for the central bank to slow its pace of rate hikes amid rising warnings that economic growth could grind to a halt. "I think the Fed has to be really careful here. If they keep going without pausing, it's really going to create a real possibility of a significant recession," Ed Yardeni, president of Yardeni Research, told CNBC " Squawk Box Asia " on Wednesday. "The Fed has to recognize that not only are they restrictive in terms of raising interest rates … and on top of that, they picked up the pace of they quantitative tightening, which means reducing the securities on their balance sheet. All that has led to a very strong dollar," he added. While the Fed's latest guidance implies yet another 75 basis point hike at its November meeting, Yardeni said he believes it's "too much too soon." He believes inflation is "starting to come down," which should convince the Fed they should "cool [the rate hikes] for a little while before it turns more hawkish." Are 'bond vigilantes' back? Yardeni said a mix of monetary tightening and fiscal stimulus has led to the return of "bond vigilantes." The veteran economist has been credited with coining the term "bond vigilantes" in the 1980s — which refers to bond market investors who sell a large amount of bonds to protest against rising inflation and to demand higher yields on their bond holdings. His comments came as the worst bond sell-off in decades is seeing few signs of abating. U.S. Treasury yields have been on a tear, as traders digest comments from several Fed speakers earlier in the week that suggested more rate hikes ahead. The benchmark 10-year Treasury yield briefly topped 4% in Wednesday trading in New York, before falling 25 basis points to yield 3.705% — the biggest decline since 2020 — after the Bank of England announced a bond-buying plan to stabilize British markets. It was trading at a yield of 3.8461% in Thursday afternoon trading in Asia.