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Federal Reserve Chairman Jerome Powell headed to Washington this week to give his semi-annual monetary policy report to Congress. Since March 2022, Powell has been battling the rise of inflation with interest rate hikes, but with consumer price increases slowing, it\u2019s an understatement to say that Wall Street has been waiting<\/a> for a policy shift. The stock market is booming to such an extent, having priced in falling inflation and multiple rate cuts, that critics are openly debating<\/a> whether it\u2019s hit bubble territory<\/a>.<\/p>\n The Street didn\u2019t get exactly what it was looking for from Powell, though. The Fed chair did reiterate that interest rates are \u201clikely\u201d at their \u201cpeak for this tightening cycle\u201d in prepared remarks, but he also expressed caution about the economic outlook and made it clear the Fed\u2019s policy stance can change as new data comes in. And as for that rate cut: it isn\u2019t here yet.<\/p>\n \u201cIf the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,\u201d he wrote in his prepared testimony<\/a>. \u201cBut the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.\u201d<\/p>\n Powell warned that cutting interest rates \u201ctoo soon or too much\u201d could cause inflation to reignite, forcing him to hike rates even higher than planned. But by the same token, he noted that cutting rates \u201ctoo late or too little\u201d could slow economic growth and damage the labor market.<\/p>\n The speech was pretty much a rehash of the Fed chair\u2019s recent public statements. But David Russell, global head of market strategy at TradeStation, argued that \u201cno news is good news\u201d when it comes to the Fed, given that Powell has repeatedly hinted that rate cuts are coming this year.\u00a0<\/p>\n \u201cWe\u2019re still in wait-and-see mode, but at least there\u2019s a broad consensus about where we\u2019re going. Higher rates are becoming less of a danger,\u201d he said in an emailed statement.<\/p>\n Stocks responded positively to Powell\u2019s rehashed comments, with the S&P 500 rising 0.8% by 1:00 pm ET, and the tech-heavy Nasdaq<\/a> jumping 1%. But the reaction was muted, given that investors are waiting to look through Powell\u2019s exchange with the Senate today and the House Representatives tomorrow.<\/p>\n Still, one thing was made clear: while many investors were pricing in March interest rate cuts just months ago, solid economic growth, strong jobs data, and higher-than-expected core inflation figures have left that outcome off the table. \u201cGiven the Fed\u2019s extreme data dependence\u2026the odds now clearly favor a June onset of the policy easing cycle,\u201d EY<\/a> chief economist Gregory Daco said in an emailed statement.\u00a0<\/p>\n Daco believes the odds of a May interest rate cut dropped to just 20% after Powell\u2019s testimony, but he still argues the Fed will ultimately cut rates by 1 percentage point this year, which would leave the Fed funds rate in a range of 4.25% to 4.5%.<\/p>\n Andrew Hunter, deputy chief U.S. economist at Capital Economics, echoed Daco\u2019s comments in a Wednesday note, arguing that the recent rise in core inflation \u201cwill prove to be noise.\u201d Hunter also believes that wage growth, which the Fed has been attempting to control in order to prevent a resurgence of inflation, will \u201cremain on a downward trend.\u201d<\/p>\n \u201cThe upshot is that we still see the first rate cut coming in June and scope for rates to then be lowered a bit more quickly than markets are pricing in,\u201d he argued.<\/p>\n<\/div>\n\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n<\/div>\n