Why investors shouldn't be clamoring for rate cuts this summer

Cutting interest rates this summer could result in a meltup for stocks, market veteran Ed Yardeni warned.

• Cutting interest rates in the next few months would be a big mistake by the Fed, Ed Yardeni said
• The market vet saw a stock market meltup in that scenario, which would take the S&P 500 to 6,000.
• The problem with meltups is that they're inevitably followed by meltdowns, Yardeni has said. 

The market should be careful what it wishes for when it comes to rate cuts from the Federal Reserve. 

Ed Yardeni, a longtime market veteran, has warned of a stock market "meltup" if the Fed were to cut interest rates this summer. If central bankers choose to ease monetary policy at the July or September policy meeting, it could cause the S&P 500 to soar 13% to 6,000 by the end of the year, he told Bloomberg Surveillance on Tuesday.

That might seem great to investors, but rally of that size would actually be unhealthy for stocks, given how expensive the market already is, the Yardeni Research president warned. In the past, Yardeni has warned that meltups are always followed by meltdowns, implying a steep drop after the market goes too far too fast.  

Yardeni has predicted the S&P 500 would notch 5,400 by the end of 2024, but stocks are already close to that level, with the benchmark index trading around 5,200 this week.

"The bull market is just constantly stampeding over my forecasts," Yardeni said, calling a summertime Fed rate cut a "mistake" and the biggest risk to the market at the moment. "The concern I have is if the Fed really does start lowering interest rates it could really create a meltup, and that would be an issue for me."

Central bankers face a difficult balancing act as they determine the path of monetary policy. High interest rates on risk tipping the economy into recession, but lowering rates too quickly risks a resurgence in inflation, which could slam American consumers. 

Fed officials have said they're looking for more evidence inflation is on track to fall to its 2% price target before mulling rate cuts. Interest rates are at their highest levels since 2001, but growth has held up strong so far, which suggests the economy is able to withstand restrictive monetary policy, Yardeni said. 

"I think it makes more sense for the Fed to provide guidance that they're not quite sure that they've gotten inflation down, and that they're not only in no rush, but they're not necessarily in the camp that interest rates have to come down. My view is that the Fed has normalized interest rates. This is where they should be," he added. 

For the most part, investors aren't expecting interest rates to come down before September. Markets are pricing in a 92% chance the Fed will keep rates level at its next policy meeting in June, and a 66% chance it will only cut rates once or twice by the end of the year, according to the CME FedWatch tool,