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Investors will be closely watching Federal Reserve Chairman Jerome Powell\u2019s press conference after next week\u2019s rate-setting meeting meeting. Federal Open Market Committee (FOMC) officials are widely expected to hold interest rates steady on June 12, as inflation has stuck well above its 2% target and consumers are proving 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, sparking a stock market rally. At least that\u2019s the opinion of Ed Yardeni, the veteran Wall Street strategist and former Fed economist who now runs Yardeni Research.<\/p>\n
Yardeni currently sees a 20% chance of a \u201cmelt-up\u201d for the stock market, but if Powell \u201csings a dovish tune\u201d at his press conference next week, he promised to raise those odds.<\/p>\n
And it\u2019s no wonder why, really. Powell has proven his ability to move markets with just a single phrase on numerous occasions, most famously at the Fed\u2019s Jackson Hole symposium in August 2022. There, Powell warned that he was dedicated to fighting inflation, even if it meant there would be some \u201cpain<\/a>\u201d for Americans. The comments led stocks to plummet in the following weeks as investors penciled in more aggressive interest rate hikes. Now, markets could be in for a different kind of surprise\u2014and it\u2019s one that would be far more appealing.<\/p>\n 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 just as officials had hoped, enabling inflation to cool (slowly) without triggering a recession. The U.S. is experiencing the \u201csoft landing<\/a>\u201d that Powell has been dreaming of since 2022 even with higher interest rates, according to Yardeni, not the \u201chard landing<\/a>\u201d that Wall Street wrongly predicted for years. That means interest rate cuts meant to stoke growth will do more harm than good\u2014at least for the economy. Yardeni has warned for months that cutting rates at any time in the coming months would be a \u201cmistake<\/a>\u201d that would only serve to reignite inflation.<\/p>\n Of course, for investors, Fed rate cuts are a different story. Lower borrowing costs and the promise of increased lending and investment in the economy are apt to supercharge the already impressive rally in stocks, which have clocked a nearly 13% rise year-to-date. Or as Yardeni put it: \u201cIf they do act prematurely [and cut rates]\u2014before inflation is convincingly back down to their 2.0% target\u2014they risk fueling a meltup in the stock market, one that may already be underway.\u201d<\/p>\n Still, most experts, including Yardeni, believe Powell will be careful not to sound too dovish in his post-FOMC press conference next week. \u201cWe expect Fed Chair Jerome Powell to push back against the markets\u2019 excitement about the prospects of Fed easing,\u201d he said.<\/p>\n Michael Gapen, chief U.S. economist at Bank of America<\/a>, is also predicting Powell will \u201cpreach patience\u201d at the press conference. In a Thursday note, Gapen said he sees the Fed revising its outlook to include slower economic growth that would typically call for rate cuts, but also \u201cfirmer\u201d inflation that would call for rate hikes.\u00a0<\/p>\n To his point, the Fed\u2019s favorite inflation gauge hasn\u2019t cooled as much<\/a> as officials would have liked this year. Year-over-year inflation as measured by the core personal consumption expenditures (PCE) price index, which excludes more volatile food and energy prices, has fallen only slightly, from 2.9% last December to 2.8% in April<\/a>. That would normally signal interest rates need to remain high.<\/p>\n But at the same time, GDP growth<\/a> 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%<\/a> on May 30.<\/p>\n With these mixed messages coming from economic data, Gapen said Powell is likely to signal that he will hold rates steady for \u201cas long as is needed\u201d to gain confidence that inflation is under control, but his fundamental disposition toward cuts won\u2019t change, given the weaker economic growth.<\/p>\n \u201cThe bottom line is we think the message will be that the April employment and inflation reports, among other data, have reaffirmed the Fed\u2019s view that the next move will be a cut. That said, it has not seen enough data to think that cut is coming soon,\u201d he wrote.<\/p>\n<\/div>\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