The Fed is poised to raise interest rates just one more time in November before stopping, according to Ed Yardeni.
That's because there is a growing risk that financial markets are on the verge of instability due to a soaring US dollar.
"The soaring dollar has been associated in the past with creating financial crisis on a global basis," Yardeni told Bloomberg.
The Federal Reserve will raise interest rates just one more time in November before it stops due to a soaring US dollar, according to market veteran Ed Yardeni.
That point of view runs counter to market consensus, which currently expects a 75 basis point rate hike in November, followed by a 50 basis point rate hike in December. Some even expect the Fed to raise rates by another 25 basis points in early 2023 before it ultimately pauses, with the Fed fund rate sitting around 4.50%. The Fed funds rate is currently between 3.00% and 3.25%.
But Yardeni warned that an overly aggressive Fed tightening policy, combined with a surging US dollar, risks breaking financial markets. The US Dollar Index has surged more than 15% year-to-date amid a tightening Federal Reserve and instability in other currencies like the British pound.
"I think it's already breaking. What's breaking is the soaring dollar. A soaring dollar has been associated in the past with creating financial crises on a global basis. We have to have a global perspective on all of this, and this tight monetary policy here is having a tremendous impact on the rest of the world, especially in emerging markets," Yardeni told BloombergTV on Monday.
The tight monetary policy from the Fed has already included three outsized 75 basis point rate hikes, a 50 basis point rate hike, and a 25 basis point rate hike all in a bid to tame inflation. The Fed has also initiated a reduction of its near $9 trillion balance sheet, as it rolls off $95 billion per month in a combination of Treasury and mortgage bonds.
"I'm totally stumped, mystified, surprised that Fed officials do not seem to acknowledge that just focusing on the Fed funds rate as a part of the monetary tightening cycle, is a mistake when you also have QT2 and a soaring dollar. These are very restrictive monetary developments," Yardeni said.
But a Fed that is too tight will ultimately cause instability in financial markets, and that should be on their radar going forward.
"I think they have one more rate hike coming in November and that will be it because the financial stability issue will pop up as a primary concern," Yardeni said.
In fact, one Fed governor seems to already be speaking out about this risk. In a speech on Friday, Fed chair Lael Brainard indicated that she was very concerned about the potential for financial instability, which at the end of the day is one of the Fed's mandates, Yardeni said.
Despite the risks, Yardeni remains optimistic about the stock market in the long-term, even though he admits a recession has likely already arrived in in Europe, China and the rest of the world. But if so, that would make the US 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 remains strong, money continues to pour into the US credit markets, and I think you're also going to see money come into the equity markets on a global basis," Yardeni said.
"I see earnings going sideways. I think we're already in a recession, it's just a growth recession," Yardeni said.