Bond market believes Fed behind the curve on inflation as Warsh takes over

Bond market investors believe the Federal Reserve needs to play catch up on inflation as its new leader takes over, according to Ed Yardeni, president of Yardeni Research.

Wall Street expects the central bank's Federal Open Market Committee to relinquish its bias toward easing rates at the policy meeting next month, Yardeni said. Bond traders are hoping that is replaced with a slant toward tighter monetary policy, the economist said.

Yardeni's evidence: The yield is above the federal funds rate, or FFR. When this happens, investors are hinting that they do not believe the FFR is high enough to bat down inflation, he said.

“The market is signaling that the current FFR is too low to curb inflation and may have to be hiked,” Yardeni wrote in a Wednesday note to clients.