Fed should add 50 bps at May meeting, says Yardeni

Yardeni is revising his previous call for 25 bps in May and another 25 bps in June. Now he says “The Fed’s policymakers are likely to be more aggressive at the next meeting because of some recent signs that inflationary pressures are emerging.”

However, he suggests that they will give the market a big hit in May, and do nothing in June. Most markets are now pricing in an 80% chance of a 50 bps move in May. Most Canadian economists seem to believe that the Bank of Canada will follow the Fed, despite the fact that the Canadian economy appears to be harbouring even less actual or potential inflation than the U.S.

Yardeni says the problem is that the Fed doesn’t get it. “The Old Fed just doesn’t seem to understand why the New Economy can grow rapidly, creating lots of jobs, without reviving inflation. I’ve tried to explain, but they just won’t listen,” he laments. “They’ve admitted that their economic models don’t work; yet they continue to rely on the most naïve versions of these models to predict that unless they continue to tighten credit conditions, inflation will be the inevitable consequence of unchecked prosperity.”

The Fed needs to learn the lessons of competition, he argues. “Competition is keeping a lid on pricing. Competition is stimulating innovation. Competition is forcing companies to boost productivity to offset labor and non-labor cost pressures.”