Why the Fed is going to have to raise interest rates in July, according to market vet Ed Yardeni

The Federal Reserve is transitioning to new leadership, but the market’s big question remains the same: are rates going up or down?

According to Wall Street veteragn Ed Yardeni, the answer is most likely up. The Yardeni Research president remains bullish on the broader US economy and the stock market, but thinks bond investors are sending a clear signal about interest rates.

“The Fed has clearly shown that they’re dropping their easing bias they had in their April meeting, and moving not to a neutral bias, but to a tightening bias at the June meeting coming up in a few weeks,” he told CNBC on Monday. “After that I think they have to follow up and actually show that they’re willing to raise rates and do it by 25 basis points.”

Yardeni said the bond market is signaling that a quick rate cut is necessary to show that Warsh and the Fed are taking inflation seriously. Consumer prices rose at their fastest pace in three years in April.

Bond yields, meanwhile, have surged. The 30-year Treasury yield on Tuesday touched the highest level since 2007, hitting 5.18%.

Yardeni attributed the steady rise in yields over the last few weeks to the perception that the central bank might be behind the curve on inflation.

And with former Fed chair Jerome Powell stepping down, all eyes are Warsh, who was hand picked by the appointed by a president who has made it clear he wants lower interest rates.

But Yardeni maintains that the Fed will follow the market and in this case, that means a 25 basis point hike in the near term.

“The two year is now indicating that the federal funds rate is too low,” he said, adding that “it’s a pretty good leading indicator of what the Fed should do, and very often it gets it right.”

While he’s calling for a hike amid concerning inflation data, Yardeni doesn’t believe markets are headed for a brutal bear market decline like 2022, which was the last time the Fed hiked rates to bring inflation down.

“I think the stock market can handle a rate rise in the bond market well,” he said.