The Fed risks a dot-com bubble-like market problem unless it lowers Wall Street’s expectations for a rate cut, said Ed Yardeni, a widely followed market strategist. With hopes rising that the central bank will issue a series of cuts this year, the head of Yardeni Research said Fed Chairman Jerome Powell needs to get ahead of the issue and signal that policymakers are taking a more measured approach. Yardeni worries that aggressive Fed easing “risks fueling irrational exuberance,” a term coined by former Fed Chairman Alan Greenspan in 1996 to refer to the surge in stock prices before the dot-com bubble burst. “Over the years, we have learned that recessions can be caused by the bursting of speculative bubbles,” the analyst wrote in his daily market briefing on Monday. “If Powell and his colleagues celebrate their success in reducing price inflation without causing a recession by lowering interest rates, they risk fueling asset inflation. When that bubble bursts, a recession will likely follow.” The S&P 500 index on Friday set a new high and added to it again on Monday. Market watchers monitor the trend of money flows, paying particular attention to the nearly $6 trillion in money market funds waiting to be deployed. There was a lot of excitement in the market when the Fed reversed the 5.25 percentage point interest rate hikes it had imposed in the past two years to fight inflation, which had been trending down although it was still above the Fed’s 2% target. . Cautionary statements from several key Federal Reserve officials, coupled with data showing strong consumer spending and a tight labor market, took some momentum away from market expectations. A week ago, futures traders expected a roughly 81% chance of a rate cut in March, which has dropped to less than 50% in recent days, according to CME Group. Longer term, the market expects five or six cuts over all of 2024, although Fed officials in December predicted only three cuts were likely. These developments come just over a week before the Fed’s next policy meeting on January 30-31. Markets expect almost no chance of a rate cut during the session. However, Wall Street will be paying close attention to what Powell has to say in his press conference next. “The Fed’s last big mistake was falling behind the inflation curve in 2021 and early 2022,” Yardeni said. “The Fed’s next big mistake could be inflating a speculative bubble in the stock market. Powell should know that. If so, he should reiterate that he is in no rush to cut interest rates.”
Yardeni worries that the Fed may fuel a bubble of “irrational exuberance” by cutting interest rates.
![Yardeni Worries That The Fed May Fuel A Bubble Of](https://ppplusnews.com/wp-content/uploads/2024/01/Yardeni-worries-that-the-Fed-may-fuel-a-bubble-of-860x484.jpeg)
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TAGGED: bubble, cutting, exuberance, Fed, fuel, interest, irrational, Rates, worries, Yardeni
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