Fed should have raised rates, says Ed Yardeni

Fed Chair Kevin Warsh's communication is becoming a credibility issue because his actions are not matching his repeated commitment to price stability, according to Ed Yardeni, President of Yardeni Research.

Yardeni believes the bond market is signalling that the Federal Reserve should have raised interest rates, and the central bank's inaction has weakened investor confidence.

Despite the sharp correction in semiconductor stocks, Yardeni remains constructive on the sector. He says the earnings outlook for chipmakers and hyperscalers remains strong, valuations have become more attractive, and the recent pullback is creating buying opportunities rather than signalling the end of the artificial intelligence (AI) led rally.

This is an edited transcript of the interview.Q: What do you make of the Fed's action yesterday? It was largely on expected lines, but the commentary from Kevin Warsh has left markets confused about where he stands.

A: We actually do know. He keeps repeating over and over again that he wants price stability. In the last Federal Open Market Committee (FOMC) meeting, the statement again said the committee will deliver price stability. He said the same thing in the statement, and he repeated it in his press conference last month, yet he didn't deliver.

He said they are watching and thinking about it, but the bond market did not react well to that at all. I think he has lost some credibility because what's he waiting for? I thought he really should have moved by 25 basis points. Maybe he couldn't get the votes.

There were certainly three dissenters who wanted to raise the federal funds rate. He could have been a dissenter, but that would not have looked very good. So maybe he was pushing for a rate hike and couldn't get the votes. So far, I would say the bond market is not giving him a vote of confidence.

Q: Exactly my point. The more he speaks, we know where he stands, but the action suggests otherwise.

A: Exactly. He's saying one thing and then not doing it.

Q: But is he saying anything at all? At the press conference he was asked, "If inflation is too high and not coming down, is the best remedy to raise interest rates?" His answer was that if inflation remains elevated, interest rates could well be part of the solution, but not in isolation. It sounded like a word salad.

A: So far, I have to say I am not impressed. There is this fixation with not providing any guidance. We already know the regional Fed presidents are going to keep giving speeches, so we are going to get plenty of guidance that way.

The other point I would make is that if what he is really saying is the Fed should not influence the markets, then he is effectively saying markets should be data-dependent, not Fed-dependent, and the Fed should then listen to the markets and react accordingly.



Well, he is not listening. The two-year Treasury note is now about 75 basis points higher than the federal funds rate. The two-year note is basically saying the Fed needs to reverse those three rate cuts made at the end of last year because those cuts weren't necessary. Right now, at least in my mind, he has a credibility issue.

Q: The sell-off in markets and the jump in bond yields are essentially the bond market calling him out, aren't they?

A: Absolutely. I coined the phrase "bond vigilantes" back in 1983. He basically said he's going to listen to them, but he's not listening, and the bond market reacted accordingly.

I think you have to raise rates to lower rates. You have to raise the federal funds rate to bring bond yields down. The bond vigilantes want to see that the Fed is serious about inflation. Right now, they are saying, "The Fed didn't do it at this meeting, so we're going to be even more vigilant." That's why the 30-year bond yield is now around 5.2%, the highest it's been in many years.

Q: Let's talk about chip stocks. The Philadelphia Semiconductor Index is down sharply again. How do you read this pullback?

A: Whenever you look at a stock chart and see prices going straight up in a very short period of time, you can almost always anticipate a move straight down. The only question is how far it goes. Is it just a correction? Is it a bear market? Will it have any fundamental impact on the company, the industry or the overall market?

What I see is that the earnings story has been phenomenal for semiconductor companies and even for the hyperscalers. The cloud computing data shows there's a lot of demand for computing. I think these hyperscalers have concluded they wish they already had that capacity because they could make even more money.

Watch the full conversation here

I am actually encouraged by what I am seeing. I don't mind having a sell-off in high-tech because it's creating buying opportunities. Earnings are holding up very well, and valuation multiples are getting to the point where these stocks are becoming downright cheap.

Q: So, you are not in the camp that says this rally is over? You see this as a buying opportunity?

A: Yes, it's a good buying opportunity. There's clearly some craziness in the market in terms of volatility. But if you have got the stomach for it, I would say you are not really catching a falling dagger. I think these are good opportunities.

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