Investors will closely monitor Federal Reserve Chair Jerome Powell's press conference after next week's rate-setting meeting. Federal Open Market Committee (FOMC) officials are widely expected to hold interest rates steady on June 12, as inflation has remained well above its 2% target and consumers are largely showing resistance to higher borrowing costs. But with just a few key words in his news conference next week, Powell could still give investors hope that rate cuts will come sometime this year, sparking a stock market rally. At least that's the opinion of Ed Yardeni, the veteran Wall Street strategist and former Federal Reserve economist who now runs Yardeni Research.
Yardeni currently sees a 20% chance of a "crash" for the stock market, but if Powell "sings a dovish tune" at his press conference next week, he promises to increase those odds.
And it's no wonder why, really. Powell has demonstrated his ability to move markets with a single phrase on numerous occasions, most famously at the Fed's Jackson Hole symposium in August 2022. There, Powell warned that he was dedicated to fighting inflation, even if it meant that there would be somepain”for Americans. The comments sent stocks tumbling in the weeks that followed, as investors planned more aggressive interest rate hikes. Now, markets could be in for a different kind of surprise, and it would be much more attractive.
Still, in his Wednesday note to clients, Yardeni opined that there is no reason for the Fed to cut rates, given that the economy is slowing as officials expected, allowing inflation to cool (slowly). ) without triggering a recession. The United States is experiencing the “Soft landing” which Powell dreams of from 2022 even with higher interest rates, according to Yardeni; not the "crash landing” that Wall Street wrongly predicted for years. That means interest rate cuts intended to stimulate growth will do more harm than good, at least for the economy. Yardeni has been warning for months that cutting rates at any time in the coming months would be a “mistake"That would only serve to revive inflation.
Of course, for investors, the Fed rate cuts are a different story. Lower borrowing costs and the promise of greater borrowing and investment in the economy may fuel the already impressive rally in stocks, which are up nearly 13% so far this year. Or as Yardeni said: “If they act prematurely [and cut rates]—before inflation convincingly returns to its 2.0% target—risk fueling a stock market crash, one that may already be underway.”
Still, most experts, including Yardeni, believe Powell will be careful not to appear too dovish at his post-FOMC press conference next week. "We hope that Fed Chair Jerome Powell will counter market enthusiasm for the prospects of Fed easing," he said.
Michael Gapen, US chief economist at Bank of America, also predicts that Powell will "preach patience" at the press conference. In a note Thursday, Gapen said he believes the Fed will revise his outlook to include slower economic growth that would normally require rate cuts, but also "firmer" inflation that would require rate increases.
In this regard, the Fed's favorite inflation gauge has not cooled down. as much as officials would have liked this year. Year-on-year inflation, measured by the personal consumption expenditure (PCE) price index, which excludes the most volatile food and energy prices, has fallen only slightly, from 2.9% last December to 2.8% in April. Normally, that would indicate that interest rates should stay high.
But at the same time, GDP growth slowed from 3.4% in the fourth quarter of last year to just 1.6% in the first quarter of this year, and that figure was revised down to a negligible figure. 1.3% on May 30.
With these mixed messages coming from the economic data, Gapen said, Powell is likely to signal that he will keep rates steady “as long as necessary” to gain confidence that inflation is under control, but his fundamental willingness toward cuts will not change. . , given the lower economic growth.
“The bottom line is that we think the message will be that the April employment and inflation reports, among other data, have reaffirmed the Federal Reserve's view that the next step will be a cut. That said, you haven't seen enough data to think the cut is coming anytime soon,” he wrote.
