The Fed is set to raise interest rates just once in November before stopping, according to Ed Yardeni.
Indeed, there is a growing risk that financial markets are on the brink of instability due to the soaring US dollar.
“The soaring dollar has been associated in the past with creating a global financial crisis,” Yardeni told Bloomberg.
According to market veteran Ed Yardeni, the Federal Reserve will raise interest rates only once in November before halting due to the surging US dollar.
This view goes against market consensus, which currently expects a rate hike of 75 basis points in November, followed by a rate hike of 50 basis points in December. Some even expect the Fed to hike rates another 25 basis points in early 2023 before finally pausing, with the fed funds rate hovering around 4.50%. The Fed funds rate is currently between 3.00% and 3.25%.
But Yardeni warned that an overly aggressive tightening policy by the Fed, combined with a rising US dollar, risked shattering financial markets. The U.S. dollar index has jumped more than 15% year-to-date amid Federal Reserve tightening and the instability of other currencies such as the pound sterling.
“I think it’s already breaking. What’s breaking is the soaring dollar. The soaring dollar has been associated in the past with creating global financial crises. We need to have a global perspective on all of this, and this tight monetary policy here is having a huge impact on the rest of the world, especially in emerging markets,” Yardeni told BloombergTV on Monday.
The Fed’s tight monetary policy has already included three outsized 75 basis point rate hikes, a 50 basis point rate hike and a 25 basis point rate hike. all with the aim of controlling inflation. The Fed has also begun a balance sheet reduction of nearly $9 trillion, as it withdraws $95 billion a month in the form of a combination of Treasuries and mortgage bonds.
“I’m totally perplexed, mystified, surprised that Fed officials don’t seem to recognize that focusing solely on the fed funds rate as part of the monetary tightening cycle is a mistake when you also have QT2 and a dollar in full These are very restrictive monetary developments,” Yardeni said.
But an overly strict Fed will eventually cause instability in financial markets, and that should be on their radar going forward.
“I think they have another rate hike coming in November and it will be all because the issue of financial stability will emerge as a major concern,” Yardeni said.
In fact, a Fed governor already seems to be talking about this risk. In a speech Friday, Fed Chair Lael Brainard indicated she was very concerned about the potential for financial instability, which ultimately is one of the Fed’s mandates, Yardeni said.
Despite the risks, Yardeni remains optimistic about the long-term stock market, although he admits that a recession has probably already arrived in Europe, China and the rest of the world. But if so, that would make the United States an attractive place for foreign investors to park their money.
“The rest of the world needs a safe haven, and the safe haven is the United States. So the dollar is staying strong, money is still flowing into US credit markets, and I think you’re also going to see money flowing into the stock market globally,” Yardeni said.
“I see earnings going sideways. I think we’re already in a recession, it’s just a growth recession,” Yardeni said.
Read the original article at Business Intern