The Fed should just 'chill' on interest rates because inflation is cooling 'at a pretty good speed', says market veteran Ed Yardeni

• The Fed needs to "chill" on the idea that the US economy needs a tighter monetary policy, according to Ed Yardeni.
• "What we want to do is bring inflation down, we don't really need a recession to do that," he said.

The Federal Reserve needs to relax, according to market veteran Ed Yardeni.

Speaking on Fox Business Thursday, the president of Yardeni Research said there are "signs of restraint" in the US economy - high mortgage rates have triggered a housing slump, retailers are having to discount their products to spur demand and the tech sector has seen large-scale layoffs, he pointed out.

"What we want to do is bring inflation down, we don't really need a recession to do that," Yardeni said. "The Fed has to chill on the idea that we need tighter financial conditions," he added.

The US central bank raised interest rates by 25 basis points last week, taking the cumulative increase since last March to 450 basis points. That's despite inflation steadily easing since mid-2022, coming in at 6.5% in December.

During his speech following the monetary decision, Powell didn't back down from projecting that more rate hikes are on the horizon. January's strong jobs market report has underscored the prospect of higher borrowing costs, since a robust labor market tends to lead to wage gains. However, investors have grown worried that too much tightening will steep the US economy into an economic downturn.

According to Yardeni, inflation is showing promising signs of cooling, and that should be enough for the US central bank to apply the brakes on its tight monetary policy.

"The important thing is we're seeing a moderation in inflation," he said, adding that Fed chair Jerome Powell and other officials have even acknowledged disinflation is now panning out in the US economy.

"But they make it sound like it's just starting. I think we're actually at a pretty good speed in getting inflation down," Yardeni said. In a Q&A with reporters, Powell suggested last week that the US economy is in the "early stages" of the disinflationary process, warning that it may take time to fully filter through the economy.

On the US stock market, Yardeni said the recent rally is likely to stall out ahead of the next inflation reading, creating some nervousness among investors.