The Fed will have to raise interest rates in July to appease ‘bond watchers,’ Yardeni said.

Sent to the Federal Reserve to lower interest rates, incoming Chairman Kevin Warsh may instead have to push higher rates to maintain credibility, market veteran Ed Yardeni said.

If the new leader of the central bank fails to show that policy makers are in line with inflationary pressure, there may be a risk of further market anger in the form of an increase in Treasury yields, added Yardeni, the originator of the term “bond watchers” to describe such cases of uncontrollable investors.

“Warsh is scheduled to chair the June Federal Open Market Committee (FOMC) meeting, but who is actually in the driver’s seat of monetary policy? We will argue that it is the Bond Vigilantes,” Yardeni, head of Yardeni Research, wrote on Monday. When it comes to policymakers’ sentiments, “Warsh will be the odd man out. But he’s the new Fed chairman, and the bond market is reacting badly to his strange stance.”

Treasury yields rose on Friday, and the 30-year bond climbed past 5% to its highest in nearly a year. The long bond on Monday morning was little changed at 5.138%. The 2-year Treasury, which is most sensitive to Fed rate moves, retreated to a low of 4.07%.

In statements before taking over as chairman, Warsh said he believed the Fed could lower its interest rate from its current target range of 3.5% to 3.75%.

However, the recent increase in inflation, caused mainly by the Iran war but also by other underlying factors, has led the markets to restore price expectations.

But it’s gotten more complicated with Warsh’s arrival: Not only does the market not believe the Fed will taper, but the odds are rising for a rate hike, with current rates implying a 42% chance of a hike by the end of the year, according to CME Group’s FedWatch tool.

Yardeni, however, thinks it will come sooner than that. While he sees the Fed holding firm at the June meeting, he believes a half-quarter rate hike is “possible” in July. However, he thinks that in June the Warsh-led Fed could take its first tightening step – by removing so-called forward-looking language in a post-meeting statement that was interpreted to mean the central bank’s next move would be cut.

“The Fed must reach out to the bond market to avoid losing control over borrowing costs and appease the Bond Vigilantes,” he said. “At the moment, they may need to see firmness instead of neutrality. A dramatic rise in FFR may really please them!”

Yardeni argues that a tightening bias from the Warsh Fed early on will help ease bond market concerns, prevent gains and allow for Fed flexibility over time.

“So by doing serious things, Warsh may have a chance to deliver what the White House wants: lower real-world borrowing costs,” he said. “Mortgage rates could fall, corporate financing would ease, and Trump could point to long-term yield declines as an economic victory.”

Yardeni’s request to climb the mountain in July is out of sync. Although the market’s probability of rising throughout the year, the current implied probability of a July increase is only 4.2%, per FedWatch.