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Recent actions by the Federal Open Market Committee (FOMC) have sparked discussion about their potential impact on the economy. Yardeni Research has drawn parallels between the current economic environment and the conditions that led to a stock market “meltup” in the 1990s.

A meltup refers to a rapid and unsustainable increase in asset prices driven more by investor sentiment than by improving fundamentals. In the 1990s, factors such as low Inflation, strong economic growth, aggressive monetary easing, low Interest rates, and technological advancements fueled a prolonged bull market. However, this surge in stock prices eventually led to a bubble that burst in the early 2000s.

Yardeni suggests that the recent rate cuts, despite the already strong economy, could set the stage for a similar trajectory. Signs of frothy valuations in the stock market are already apparent, and further easing could intensify these trends. By reducing recessionary risks, the Fed’s policy may spur a stock market rally primarily fueled by investor exuberance rather than solid economic fundamentals.

While the decision to cut rates in a robust economy carries risks, such as potential overvaluation and increased macroeconomic volatility, the Fed’s move aims to prevent a significant rise in unemployment. However, prioritizing short-term economic stability over long-term stability could lead to overheating, as seen in the 1990s.

While Powell and other Fed officials believe that further rate cuts can help steer Inflation towards their target of 2%, analysts caution about the potential for higher long-term Inflation and volatility as the market adjusts to easier monetary policy. Despite this, Yardeni remains positive about the long-term outlook for productivity growth, envisioning a “Roaring 2020s” scenario driven by technological advancements.

However, even in the face of optimistic growth prospects, Yardeni warns that a stock market meltup could potentially trigger a subsequent correction or crash.

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