- Ed Yardeni says the Fed’s easing bias is “no longer appropriate” and must be dropped at the June 16-17 FOMC meeting — or investors will conclude the central bank is “falling behind the inflation curve” and demand a higher risk premium.
- Traders now see a ~75% chance of a Fed rate hike by December 2026 — a complete reversal from January, when markets expected two quarter-point cuts this year.
- 30-year Treasury yields are above 5% (near 2007 highs); 10-year yields hit 4.63% Monday; Yardeni sees them potentially peaking at 4.75%–5% — which he calls a buying opportunity for both bonds and stocks.
- Gundlach (DoubleLine) and Pimco CIO Dan Ivascyn agree: cutting rates when the 2-year Treasury is 50 bps above the fed funds rate is “just not possible,” per Gundlach.
What Happened?
Ed Yardeni, who coined the term “bond vigilantes,” published a note urging the Federal Reserve to remove its easing bias at incoming Chair Kevin Warsh’s first FOMC meeting on June 16-17 and shift explicitly to a tightening policy stance. Yardeni argues that maintaining an easing bias in the face of surging energy-driven inflation — Brent above $110, 30-year yields above 5%, and consumer/wholesale inflation at multiyear highs — signals that the Fed is behind the curve, which only invites bond vigilantes to push yields higher. The 30-year Treasury yield is now near its highest since 2007; 10-year yields hit 4.63% Monday in Asia, up three basis points. Markets have completely repriced: from two cuts expected in January to a 75% probability of a hike by December.
Why It Matters?
Yardeni’s argument is counterintuitive but compelling: a more hawkish Warsh could actually deliver what Trump wants — lower long-term borrowing costs — by convincingly anchoring inflation expectations. If markets believe the Fed is credibly fighting inflation, the inflation risk premium embedded in long-term yields would compress, bringing down mortgage rates and corporate financing costs without requiring a single rate cut. This is the “credibility premium” that Paul Volcker demonstrated in the 1980s. The alternative — a Fed that holds an easing bias while inflation runs hot — risks the 1970s scenario where vigilantes drive long-term yields to levels that actively damage the economy Trump is trying to support.
What’s Next?
The June 16-17 FOMC is now the single most important near-term market event. Warsh’s first communication as chair — dot plot, press conference tone, and any shift in the policy statement language — will set the macro narrative for the summer. Yardeni sees 4.75%–5% on the 10-year as a potential peak and buying opportunity; Bloomberg’s Mark Cranfield cautions that 5% yields are currently “emboldening bond bears” rather than attracting value buyers. Watch whether Warsh uses the June meeting to signal a hawkish pivot — and whether the bond market rewards credibility with lower long-term yields, as Yardeni’s thesis predicts.
Source: Bloomberg
