Investors will be closely watching Powell’s press conference following next week’s rate decision. Federal Open Market Committee officials are widely expected to keep interest rates unchanged on June 12 as U.S. inflation continues to run above its 2% target and consumers have shown resilience to higher borrowing costs.
Ed Yardeni, a veteran Wall Street strategist and former Federal Reserve economist, said Powell could still give investors hope for a rate cut this year, triggering a rally in U.S. stocks.
Yardeni currently puts the probability of a meltdown in U.S. stocks at 20%, but he said that probability would increase if Powell comes off as dovish at next week’s press conference.
Powell has proven many times that he can shake the market with just a single word, most notably at the Jackson Hole Symposium in August 2022. At the time, Powell warned that he was committed to fighting inflation, even if it meant inflicting some "pain" on Americans. His comments led to a sharp drop in U.S. stocks in the following weeks as investors expected more aggressive rate hikes. Now, the market may be in for a different type of surprise.
However, Yardeni believes that given that the economy is slowing down as Fed officials hope, which will help cool inflation without triggering a recession, the Fed has no reason to cut interest rates. Yardeni pointed out that even with higher interest rates, the United States is still experiencing the "soft landing" that Powell has dreamed of since 2022, rather than the "hard landing" that Wall Street has wrongly predicted for years. This means that cutting interest rates will do more harm than good.
Of course, for investors, the Fed's rate cuts are another story altogether. Lower borrowing costs are likely to give the stock market a stronger boost, with the market up nearly 13% so far this year. As Yardeni puts it: "If they act too early, they risk igniting a melt-up in U.S. stocks, which may have already begun."
However, most experts, including Yardeni, believe that Powell will avoid sending overly dovish signals at next week's press conference. He said, "We expect Powell to counter the market's enthusiasm for the prospect of Fed easing policy."
Michael Gapen, chief U.S. economist at Bank of America, also predicted that Powell will "advocate for patience" at his press conference. In a note Thursday, Gapen said he expects the Fed to revise its outlook to incorporate slower economic growth, which would typically require rate cuts, but also a description of "more stubborn" inflation, which would call for rate hikes.
As he noted, the Fed’s favorite inflation measure has not cooled this year as officials had hoped. The core personal consumption expenditures price index (PCE) has fallen only slightly from an annual rate of 2.9% in December to 2.8% in April. This typically suggests that interest rates need to remain high.
But at the same time, GDP growth slowed from 3.4% in the fourth quarter of last year to 1.6% in the first quarter of this year, and on May 30 the figure was revised down to a paltry 1.3%.
Gapen said that faced with conflicting signals from economic data, Powell may suggest that he will maintain current interest rates "as long as necessary" to ensure that inflation is under control, but his basic preference for rate cuts will not change given the slowdown in economic growth.
“Ultimately, we think the message will be the April jobs and inflation reports, along with other data, reaffirming the Fed’s view that the next move will be a rate cut,” Gapen said. “That said, officials haven’t seen enough data to suggest a rate cut is imminent.”
The article is forwarded from: Jinshi Data
