Senior Wall Street analyst: Powell is expected to boost U.S. stocks next week

Zhitong Finance learned that Ed Yardeni, a senior Wall Street strategist, former Federal Reserve economist, and president of Yardeni Research, said that any dovish keywords in Powell's speech after the Fed's interest rate meeting next week could trigger a sharp rise in US stocks.

Investors will pay close attention to the press conference of Federal Reserve Chairman Powell after next week's interest rate setting meeting. The market generally expects Federal Open Market Committee (FOMC) officials to keep interest rates unchanged on June 12, as US inflation is well above the 2% target and consumers have shown great resilience to higher borrowing costs.

But at next week's press conference, Powell may still give investors hope for a rate cut with just a few keywords, triggering a stock market rebound. At least that's Yardeni's view. Yardeni currently believes that there is a 20% chance of a "melt-up" in the stock market, but if Powell "sings a dovish tone" at next week's press conference, he believes that the probability will increase.

The market should be familiar with this scenario. Powell has demonstrated his ability to sway the market with just one sentence on many occasions, most notably at the Fed's Jackson Hole Symposium in August 2022. At that meeting, Powell warned that he was committed to fighting inflation, even if it meant some "pain" for Americans. The comments sent stocks tumbling in the weeks that followed as investors expected the Fed to raise rates more aggressively. Now, the market could be in for another surprise, and one that's far more appealing.

In a note to clients Wednesday, though, Yardeni argued that the Fed has no reason to cut rates now that the economy is slowing as officials had hoped, because high rates are cooling inflation (slowly) without sparking a recession. Yardeni said the U.S. is experiencing the "soft landing" that Powell has been dreaming of since 2022, even with higher rates; not the "hard landing" that Wall Street has wrongly predicted for years. That means rate cuts aimed at spurring growth will do more harm than good -- at least for the economy. Yardeni has been warning for months that a rate cut at any point in the coming months would be a "mistake" that would only reignite inflation.

Of course, for investors, a Fed rate cut is another story. Lower borrowing costs and the promise of more lending and investment in the economy could further fuel an already impressive stock market rally, which has risen nearly 13% so far this year. Or as Yardeni put it: "If they act (to cut rates) too soon -- before inflation has convincingly moved back toward the 2.0% target -- they could exacerbate a stock market crash that may already be underway."

Still, most experts, including Yardeni, agree that Powell will be careful not to sound too dovish at next week's post-FOMC press conference. "We expect Fed Chair Powell to push back against market euphoria over the Fed's accommodative outlook," he said.

Bank of America Chief U.S. Economist Michael Gapen also predicted that Powell will "preach patience" at the press conference. In a note Thursday, Gapen said he expects the Fed to revise its forecasts to factor in slower economic growth, which would typically call for rate cuts, but also "stabilizing" inflation, which would call for rate hikes.

For his part, the Fed's favorite inflation measure has not cooled this year as officials had hoped. Year-over-year inflation, as measured by the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, has fallen only slightly, from 2.9% in December to 2.8% in April. That typically means interest rates need to remain high. But at the same time, GDP growth slowed from 3.4% in the fourth quarter of last year to 1.6% in the first quarter of this year, and the figure was revised down to 1.3% on May 30.

Gapen said that with these mixed messages from economic data, Powell may signal that he will keep interest rates stable "as long as necessary" to gain confidence that inflation is under control, but his fundamental bias for rate cuts will not change given weak economic growth.

"We think the bottom line is that the April employment and inflation reports and other data will reaffirm the Fed's view that the next step will be a rate cut," Gapen added. Still, it hasn't seen enough data to think a rate cut will come soon.