- The
Federal Reserve 's bond purchases are pushing risk-on attitudes to dangerous levels, Ed Yardeni, the president of Yardeni Research, said in a Monday note. - The stock market's rally following the
Fed 's March 23 policy announcement is the fastest since 1933 — and this "Mother of All Meltups" could quickly give way to an equally steep collapse, Yardeni cautioned. - "The goal was to restore liquidity to credit
markets ," he wrote, adding that overextended Fed action risks "the greatest financial bubble of all times." - The
central bank 's move into junk-rated credit is "stoking moral hazard" and encouraging outsize risk-taking, Yardeni added. - Visit the Business Insider homepage for more stories.
The Federal Reserve's aid efforts successfully lifted liquidity concerns, but keeping the central bank's spigot open too long could create a massive market threat, Ed Yardeni, the president of Yardeni Research, said in a note to clients on Monday.
The central bank's March 23 announcement of new intervention marked a turning point for financial markets. The Fed's move into corporate credit markets set a backstop for risk assets and drove investors back to highly volatile markets after weeks of severe sell-offs.
The rally from March 23 to June 8 was the market's biggest since 1933, and Yardeni said he now fears that the "Mother of All Meltups" could give way to an equally steep crash if risk-on attitudes turn overextended.
"The goal was to restore liquidity to the credit markets. They are clearly functioning well again," he wrote. "If the Fed persists in flooding the markets with liquidity, the risk is that the Fed will create the greatest financial bubble of all times."
Though the stock market's run-up is its fastest in nearly a century, the strategist sees it as more closely resembling the tech melt-up in the late 1990s. During the rally, investors viewed the Fed as a key support for equity prices and expected Chairman Alan Greenspan to rescue markets just as he did in the late 1980s.
But the bubble eventually burst, and a similar slide is possible "if the Fed continues to spike the punch bowl," Yardeni wrote.
The Fed's boosting of risk-on activity isn't relegated to the stock market. Investment-grade debt issuance reached $1 trillion at a record pace on the central bank's coattails, signaling a massive improvement in market health despite the Fed buying only about $7 billion worth of bonds.
The central bank has also bought up junk-rated debt through exchange-traded funds, a move Yardeni fears will blur investors' perception of market risk.
"It's hard to understand why the Fed feels obligated to support both the buyers and the sellers of these dodgy bonds since they all well understood the riskiness of owning and issuing BBB-rated debt," he wrote. "The Fed is stoking moral hazard."
Yardeni isn't the only one probing the necessity of keeping the Fed's relief programs online. During a congressional hearing on June 16, Sen. Pat Toomey of Pennsylvania asked Fed Chairman
The chair said such programs were necessary to ensure proper market functioning, but Yardeni said such sentiments could do more long-term harm than good.
"Fed officials may be too pessimistic about the outlook for the economy," the strategist said. "If so, then they might continue to flood the financial markets with too much liquidity, thus raising the risks of inflating asset bubbles."
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