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Fed FOMC Preview: Powell's View on Rate Cuts Takes Center Stage After Cooler CPI

Published 06/12/2024, 09:24 AM
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  • Investors are bracing for the Federal Reserve’s latest policy decision after better-than-expected May CPI.
  • All eyes are now on Powell's press conference after the decision.
  • Investors should now be vigilant, exercise caution, and diversify portfolios to hedge against potential market fluctuations.
  • Are you looking for actionable trade ideas to navigate the current market volatility? Unlock access to InvestingPro’s AI-selected stock winners for just $0.60 a day!

The Federal Reserve will reveal its latest policy decision on Wednesday afternoon and the stakes are high. The announcement will come just a few hours after the May CPI report came in cooler than expected. Fed Decision

Source: Investing.com

No action by the U.S. central bank is seen as the most likely outcome. However, updated dot-plot projections for interest rates and fresh commentary from Fed Chair Jerome Powell may be a wild card.

As such, there will be a lot on the line when the Fed’s Open Market Committee delivers its monetary policy decision and updated economic projections at 2:00 PM ET on Wednesday.

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What To Expect:

The Fed is all but certain to keep the benchmark Fed funds target range between 5.25% and 5.50%, where it has been since July 2023, as policymakers assess signs of a resilient economy, a robust labor market, and elevated inflation.Fed Funds Rate

Source: Investing.com

FOMC officials will also release their new forecasts for interest rates and economic growth, known as the dot plot, which will reveal greater signs of the Fed's likely rate trajectory through the rest of 2024 and beyond.

In March, the dot plot indicated that policymakers anticipated three 25-basis point rate cuts by the end of the year. However, the economic landscape has shifted since then.

All eyes will then turn to Fed Chairman Jerome Powell, who will hold what will be a closely watched press conference at 2:30 PM ET as investors look for fresh clues on how he views the economy and inflation trends.

When Powell last spoke in mid-May, he warned that inflation is falling more slowly than expected and that monetary policy needs to be restrictive for longer.

Prediction:

While the Fed is all but certain to remain on hold, investors should brace themselves for a longer wait for rate cuts than previously anticipated despite the CPI report coming in cooler than expected. This is because the economy has held up better than anticipated, and the labor market remains strong.

In the post-meeting press conference, Chairman Powell is likely to underscore that Fed officials will need to see several more months of low inflation readings before they would consider cutting rates. Meanwhile, updated dot plot projections are expected to indicate a significant change to reflect the Fed's new stance on the latest data.

Given the proximity of the U.S. presidential election in November, it is increasingly likely that the Fed will avoid initiating a rate-cutting cycle starting in September. The central bank traditionally prefers not to make significant policy shifts close to elections to avoid any perception of political influence.

Considering the above factors, it appears the Fed might keep borrowing costs higher for longer than markets currently anticipate. This scenario aligns with the Fed’s cautious approach to ensure inflation is firmly under control before easing monetary policy.

As such, December is emerging as the most probable timeline for the start of an easing cycle in my view. Investors should adjust their expectations accordingly, as the central bank navigates these complex economic and political landscapes.

What To Do Now:

Any indications or shifts in the Fed's tone during the meeting could trigger significant market movements and investor sentiments. Taking that into consideration, market participants are advised to remain vigilant, exercise caution, and diversify portfolios to hedge against potential market fluctuations.

To navigate the current market volatility I used the InvestingPro stock screener to build a watchlist of high-quality stocks that are showing strong relative strength and have healthy growth prospects.

Not surprisingly, some of the names to make the list include Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO), Costco (NASDAQ:COST), and Salesforce (NYSE:CRM) to name a few.

Stock Screener Results

Source: InvestingPro

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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDRS&P 500 ETF (SPY), and the Invesco QQQ Trust ETF (QQQ).

I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.

The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

Follow Jesse Cohen on X/Twitter @JesseCohenInv for more stock market analysis and insight.

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