Investors will be closely watching Federal Reserve Chairman Jerome Powell’s press conference after the central bank’s interest rate hike meeting next week. With inflation running well above its 2% target and consumers largely resistant to higher borrowing costs, Federal Open Market Committee officials are widely expected to keep interest rates unchanged on June 12. But with just a few key words in next week’s press conference, Powell could give investors hope that a rate cut will come before the end of the year, sparking a rally in stocks. At least, that’s what veteran Wall Street strategist and former Fed economist Ed Yardeni, who now runs Yardeni Research, thinks.
Yardeni currently sees a 20% chance of the stock market “spiking,” but promises to raise that probability if Powell takes a “dovish tone” at his press conference next week.
And it’s not really surprising why. Powell has proven his ability to move markets with a single word on multiple occasions, most famously at the Jackson Hole Federal Reserve symposium in August 2022, where he warned that he was committed to fighting inflation, even if it meant some “pain” for the American people. Following his remarks, investors expected more aggressive rate hikes, and stocks plummeted in the weeks that followed. Now the market could be in for a different kind of surprise — and one that would be much more appealing.
Still, Yardeni said in a client note on Wednesday that he sees no reason for the Fed to cut rates, given that the economy is slowing as officials hoped and inflation is (slowly) subsiding without triggering a recession. Yardeni said the U.S. is experiencing the “soft landing” Powell dreamed of, even with rising interest rates from 2022 onward, and not the “hard landing” Wall Street had wrongly predicted for years. That means cutting rates to stimulate growth would 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” and would only reignite inflation.
For investors, of course, a Fed rate cut is a different story. Lower borrowing costs and the promise of more lending and investment in the economy would spur an already impressive rally in stocks, which are up nearly 13% this year. “If the Fed acts prematurely, [and cut rates]They risk encouraging a stock market crash before inflation has credibly returned to the 2.0% target, and that crash may already be starting.”
Still, most experts, including Yardeni, expect Powell to be careful not to sound too dovish in his post-FOMC press conference next week. “We expect Fed Chairman Jerome Powell to push back against market excitement over the prospects for Fed easing,” he said.
Bank of America Chief U.S. Economist Michael Gapen also expects Powell to “preach patience” at the news conference. In a Thursday note, Gapen said he expects the Fed to revise its outlook to take into account not just slowing economic growth (which would normally require rate cuts) but also “firming” inflation (which would require rate hikes).
As he points out, the Fed’s favorite inflation measure hasn’t cooled as much this year as officials would have liked: Year-over-year inflation, measured by the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, fell just slightly, from 2.9% in December to 2.8% in April. Normally, that would signal the need to keep interest rates 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, a figure that was revised downwards to just 1.3% on May 30.
Amid these conflicting messages from economic data, Gapen said Powell is likely to signal he will keep rates on hold “as long as necessary” to gain confidence that inflation is under control, but that his fundamental stance on cutting rates is unlikely to change given weak economic growth.
“In short, I think the message is that the April employment, inflation and other data reaffirm our view that the Fed will cut rates next, although there is not enough data to suggest a rate cut is imminent,” he wrote.
