The stock market rally risks sparking an unsustainable 'melt-up' as the economy overheats, market vet Ed Yardeni says
Adobe Firefly, Tyler Le/BI
- The stock market runs a bigger risk of an unsustainable melt-up, according to Ed Yardeni.
- The market veteran thinks steep rate cuts risk overheating the already-strong US economy.
- Inflation is still an issue, he said, pointing to inflationary pressures after the election.
Stocks run the risk of seeing an unsustainable, dot-com style melt-up, thanks to the Federal Reserve's recent rate cut, according to market veteran Ed Yardeni.
Speaking to Bloomberg on Monday, the Yardeni Research president pointed to the effects of central bankers cutting rates 50 basis points at last week's policy meeting. That move sparked a rally in stocks to fresh records —but it's also raised the odds of a stock market melt-up, he said, meaning investors are now facing the risk of an unsustainable market boom.
Yardeni estimated that the odds of such a meltdown have been raised from 20% to 30%. He previously predicted that such a scenario could end in a swift decline in stock prices, similar to the internet bubble several decades ago.
"I raised the odds of an outright melt-up, like something we had in the 1990s," Yardeni said. "I think that by cutting rates by 50 basis points and by indicating they want to do more, based on some of the recent comments, they risk overheating a warm economy. The economy's doing quite well."
Fed rate cuts are expected to loosen financial conditions, but the economy is already on solid footing, Yardeni said, pointing to strength in the job market and overall economic activity. Jobless claims ticked lower last week, with just 219,000 new Americans claiming unemployment benefits, according to the Labor Department. The unemployment rate has edged up slightly this year but is still low at 4.2%.
Meanwhile, GDP is expected to grow 2.9% over the third quarter, per the latest Atlanta Fed GDPNow reading, about the same pace it grew the prior quarter.
And while inflation has cooled from its highs several years ago, it is still a risk, Yardeni noted. His warning echoes other financial commentators, who have noted that rising debt levels, geopolitical tensions, and other pressures could eventually spark a resurgence of high inflation.
Fed governor Michelle Bowman, the only FOMC member who dissented with the Fed's 50 basis point cut last week, said she was worried markets would interpret the policy move as a "premature declaration of victory" over inflation. Central bankers haven't reached their 2% inflation goal yet, she added, urging policymakers to take caution in lowering rates.
"If they get to overheat the economy and get to create a bubble in the stock market, yeah they're creating some issues," Yardeni added. "I'm concerned that they're just completely ignoring what's right ahead of us here, which is a presidential election, and either candidate does policies that are likely to be inflationary and load the deficit again."