Investors will be closely watching Fed Chairman Jerome Powell’s press conference after next week’s interest rate meeting. Federal Open Market Committee (FOMC) officials are widely expected to hold rates steady on June 12, as inflation has remained well above the 2% target and consumers appear largely resilient to higher borrowing costs. But with just a few key words at his press conference next week, Powell could still give investors hope that rate cuts are on the way sometime this year, triggering a rally in stock markets. At least that’s the view of Ed Yardeni, the veteran Wall Street strategist and former Fed economist who now runs Yardeni Research.
Yardeni currently sees a 20% chance of a melt-up for the stock market, but if Powell “sings a forgiving tune” at his press conference next week, he promises to increase those odds.
And it’s really no wonder why. Powell has proven on numerous occasions that he can move the markets with just a single sentence, most famously at the Fed’s Jackson Hole Symposium in August 2022, where Powell warned that he was committed to fighting inflation, even if it meant there would be some “pain” for Americans. The comments caused stocks to tumble in subsequent weeks as investors implemented more aggressive rate hikes. Now the markets could be in for a different kind of surprise, and it would be much more attractive.
Still, Yardeni argued in his letter to clients on Wednesday that there is no reason for the Fed to cut rates as the economy is slowing, just as officials had hoped, allowing inflation to cool (slowly) without triggering a recession. According to Yardeni, the US is experiencing the ‘soft landing’ that Powell has been dreaming of since 2022, even with higher interest rates; not the “hard landing” that Wall Street incorrectly predicted for years. That means interest rate cuts aimed at boosting growth will do more harm than good – at least for the economy. Yardeni has been warning for months that cutting rates at any point in the coming months would be a “mistake” that would only fuel inflation.
For investors, interest rate cuts by the Fed are of course a different story. Lower borrowing costs and the promise of more lending and investment in the economy could further boost the already impressive rally in stock markets, which are up almost 13% year to date. Or as Yardeni put it: “If they do act prematurely [and cut rates]– before inflation has convincingly fallen back to the 2.0% target – they risk triggering a stock market melt-up, which may already be underway.”
Still, most experts, including Yardeni, believe Powell will be careful not to sound too dovish at his post-FOMC press conference next week. “We expect Fed Chairman Jerome Powell to buck the markets’ excitement over the prospects of Fed easing,” he said.
Michael Gapen, chief US economist at Bank of America, also predicts Powell will “preach patience” at the press conference. In a note on Thursday, Gapen said he sees the Fed revising its outlook to take into account slower economic growth, which would generally lead to rate cuts, but also “stronger” inflation, which would require rate hikes.
As far as he’s concerned, the Fed’s favorite inflation gauge hasn’t cooled as much this year as officials would have liked. Annual inflation, as measured by the core personal consumption expenditure (PCE) price index, which excludes more volatile food and energy prices, fell only slightly, from 2.9% last December to 2.8% in April. Normally that would be a signal that interest rates should remain 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 paltry 1.3% on May 30 .
With these mixed messages from the economic data, Gapen says, 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 bias toward austerity will not change. , given weaker economic growth.
“The bottom line is that we think the message will be that the April employment and inflation reports, among other things, have confirmed the Fed’s view that the next step will be a cutback. That said, the country hasn’t seen enough data to think a cut is coming anytime soon,” he wrote.
This story originally appeared on Fortune.com
