What Stock and Bond Markets Would Find 'Surprising' From Fed Chair Jerome Powell

Markets are keenly observing Federal Reserve Chair Jerome Powell’s statements on Wednesday, focusing on the potential for interest rate cuts as early as September. Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, suggested in an interview that it would surprise the market if Powell did not confirm readiness to lower rates at the next meeting. Rieder expressed significant confidence in the Fed’s likelihood to soon reduce rates, citing substantial decreases in inflation and a stable, albeit slightly softening, U.S. economy.

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The Federal Reserve will release a policy statement at 2 p.m. Eastern Time, followed by Powell’s press conference at 2:30 p.m. Investors generally anticipate the Fed will maintain the current rate of 5.25% to 5.5% until the next policy meeting in September, when rate reductions may commence. The current rate is the highest since 2001, aimed at reducing inflation to a target of 2% by curbing economic demand.

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Rieder believes that reducing the Fed’s current rate by a percentage point over the next six to nine months should be straightforward. With inflation declining, he argues that the Fed’s current rate, which he considers highly restrictive, could be eased to a merely restrictive level of 4% to 4.5%. However, the extent of future rate reductions remains uncertain.

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As of Wednesday morning, traders in the fed-funds futures market estimated an 87.7% likelihood that the Fed would start lowering its benchmark rate by a quarter percentage point in September, according to the CME FedWatch Tool. The market also anticipates up to three such reductions by December and potentially seven by September 2025, which Rieder considers aggressive, noting that significant developments will occur before such extensive cuts are realized.

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George Catrambone, Head of Fixed Income for the Americas at DWS Group, expects Powell to prepare the ground for a September rate cut, pointing to a more balanced economy. With inflation decreasing, Powell may emphasize the Fed’s dual mandate, focusing more on maximum employment. The U.S. unemployment rate rose to 4.1% in June, a historically low level, but investors are closely monitoring the labor market for any signs of weakness as the Fed aims to reduce inflation without triggering a recession.

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David Mericle, Chief U.S. Economist at Goldman Sachs Group, highlighted in a recent research note that the labor market is still strong, similar to pre-pandemic levels, which balanced full employment and near-target inflation. Earlier this month, data from the consumer price index (CPI) showed U.S. inflation decreased in June for the first time since 2020, with the annual rate dropping to 3%. Core inflation, excluding energy and food prices, rose by 3.3% over the 12 months through June.

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The CPI report indicated that shelter prices are finally declining. According to Rieder, the six-month annualized moving average for core CPI inflation, excluding shelter, is 2%. Additionally, Yardeni Research has identified deflationary trends, including pressures on retailers and falling prices in commodity markets and durable goods. Ed Yardeni, President of Yardeni Research, noted that these deflationary pockets will provide some consumer relief, distinguishing deflation (price decreases) from disinflation (slower inflation rate).

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As investors awaited the Fed’s interest-rate decision, the U.S. stock market showed significant gains on Wednesday morning. The S&P 500 was up 1.5%, the tech-heavy Nasdaq Composite jumped 2.3%, and the Dow Jones Industrial Average rose 0.3%, according to FactSet data.

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In the bond market, Treasury yields were declining Wednesday morning. The yield on the 10-year Treasury note fell by about five basis points to around 4.09%, and the two-year Treasury yield dropped by about two basis points to around 4.34%. On Tuesday, the two-year Treasury rate decreased to 4.359%, its lowest since February 1, based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

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Despite Yardeni’s skepticism about the necessity of rate cuts given the robust U.S. economy, he acknowledged that the market would be highly surprised if no rate cut were announced for September. Yardeni warned that a hawkish message from the Fed, suggesting a need for more confidence in achieving the 2% inflation target, would likely result in a negative market reaction.

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