If the Fed opts to cut rates to stave off a recession, stocks may plummet following an ill-conceived ‘melt-up’.

Market veteran and investment strategist Ed Yardeni warns of an impending risk: the Federal Reserve’s actions could ignite a stock market melt-up. This concern arises from the resurgence of the “Fed Put” concept, wherein the Fed intervenes with interest rate cuts at the first signs of economic fragility. Fed Chairman Jerome Powell’s recent suggestion that the next move in interest rates is likely a cut has reinforced this belief among investors.

“Investors now believe the Fed will intervene to prevent a recession, reviving the Fed Put,” Yardeni advised clients in a note on Tuesday. “This revival diminishes recession and bear market risks but heightens the possibility of a stock market melt-up.”

The anticipation of Fed intervention, whether it materializes or not, could spark a surge in investor confidence, unleashing a wave of optimism that propels the stock market to new heights.