Jerome Powell: Future announcements have investors on edge

All eyes will be on Federal Reserve Chairman Jerome Powell as he takes the podium following the Federal Open Market Committee (FOMC) meeting scheduled for June 12. The meeting is expected to maintain current interest rates, reflecting concerns over persistently high inflation and a surprisingly resilient consumer base despite increasing borrowing costs.

However, it’s not the rate decision that makes investors anxious—it’s the potential for Powell’s remarks to ignite market optimism. With just a few carefully chosen words, Powell could hint at future rate cuts, potentially sparking a stock market rally.

This sentiment is echoed by veteran Wall Street strategist Ed Yardeni, who runs Yardeni Research and sees a 20% chance of a “melt-up” in the stock market. “If Powell strikes a dovish tone,” Yardeni promises to raise those odds.

Words of Jerome Powell

Powell’s influence over markets with his words is well-documented. His remarks at the Jackson Hole symposium in August 2022, where he pledged to combat inflation even at the cost of economic pain, caused stocks to tumble as investors braced for aggressive rate hikes. Now, investors are hoping for a different kind of surprise, one that could propel the market to new heights.

In his recent note to clients, Yardeni argued that there is no immediate need for the Fed to cut rates. The economy is slowing as intended, allowing inflation to cool without triggering a recession.

For investors, however, rate cuts mean lower borrowing costs and the promise of increased lending and investment, which could supercharge the stock market’s already impressive rally, up nearly 13% year-to-date. Yardeni cautions that premature rate cuts could fuel an already budding “melt-up” in stocks.

Michael Gapen, chief U.S. economist at Bank of America, shares this view. In a note released Thursday, Gapen predicted that Powell would “preach patience.” He expects the Fed to revise its outlook to account for slower economic growth, typically a signal for rate cuts, alongside persistently high inflation, which usually calls for rate hikes.

Investors’ anticipation

“The bottom line,” Gapen wrote, “is that the Fed believes the next move will be a rate cut, but not soon.” The April employment and inflation reports have reinforced this view, indicating that the Fed will wait for more conclusive data before making any cuts.

As investors await Powell’s remarks, the anticipation is palpable. His words could very well set the tone for the stock market‘s trajectory in the coming months. Whether he delivers a dovish hint or preaches patience, Powell’s press conference promises to be a pivotal moment for investors and the economy alike.

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