Jerome Powell could trigger a stock market boom – even without rate of interest cuts, says Wall Street guru

Yardeni currently sees a 20 percent probability of a melt-up within the stock markets, but he has promised to extend those possibilities if Powell “sings a dovish song” at his press conference next week.

And really, it’s no wonder why. Powell has demonstrated his ability to maneuver markets with a single sentence on quite a few occasions, most famously on the Fed’s Jackson Hole symposium in August 2022. There, Powell warned that he was committed to fighting inflation, even when it meant some “pain” for Americans. The comments caused stock prices to plunge within the weeks that followed as investors factored in additional aggressive rate hikes. Now, markets could also be in for a special form of surprise – and one that will be way more appealing.

Still, Yardeni said in his note to clients on Wednesday that there isn’t a reason for the Fed to chop rates since the economy is slowing exactly as officials hoped, allowing inflation to (slowly) cool without triggering a recession. The U.S. is experiencing the “soft landing” that Powell has been dreaming of since 2022, even with higher rates, in response to Yardeni, relatively than the “hard landing” that Wall Street has been wrongly predicting for years. That signifies that rate cuts designed to spice up growth will do more harm than good – at the very least for the economy. Yardeni has been warning for months that a rate cut at any point in the approaching months can be a “Mistake“That would only serve to reignite inflation.

For investors, after all, Fed rate cuts are a special story. Lower borrowing costs and the promise of increased lending and investment within the economy are prone to fuel an already impressive rally in stocks, which have risen nearly 13% for the reason that starting of the yr. Or as Yardeni put it: “If they act too quickly, [and cut rates]“If they do not do so – before inflation has fallen significantly back to the 2.0% target – they risk triggering a stock market crash that may already be underway.”

Still, most experts, including Yardeni, consider Powell might be careful to not sound too dovish in his post-FOMC press conference next week. “We expect Fed Chair Jerome Powell to dial back market excitement about the prospect of Fed easing,” he said.

Michael Gapen, chief economist at Bank of America within the US, also predicted that Powell would “preach patience” on the press conference. In an announcement on Thursday, Gapen said he expected the Fed to revise its forecast. It would take note of slower economic growth, which might normally require rate of interest cuts, but additionally “firmer” inflation, which might require rate of interest hikes.

In his view, the Fed’s hottest inflation indicator has not fallen as much this yr because the Fed would have liked. Year-on-year inflation, as measured by the core personal consumption expenditures (PCE) index, which strips out more volatile food and energy prices, has fallen only barely, from 2.9 percent last December to 2.8 percent in April. That would normally be an indication that rates of interest must remain high.

At the identical time, GDP growth slowed from 3.4% within the fourth quarter of last yr to only 1.6% in the primary quarter of this yr, and this figure has been revised downwards to a meager 1.3% on the thirtieth of May.

Given these conflicting signals from the economic data, Powell is prone to signal that he’ll keep rates of interest stable “for as long as necessary” to realize confidence that inflation will be controlled. However, his fundamental inclination to chop rates of interest won’t change within the face of weaker economic growth.

“The bottom line is that we believe the message will be that the April employment and inflation reports, among other data, reinforced the Fed’s view that the next step will be a rate cut. However, the Fed does not have enough data to assume that that rate cut will happen soon,” he wrote.