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A Dovish Powell Could Set Stage for Stocks to Erase All Losses by Year-End

Stock Markets Aug 20, 2022 07:24AM ET
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By Yasin Ebrahim

Investing.com -- Federal Reserve chairman Jerome Powell is expected to deliver fresh clues on monetary policy next week, and some investors believe that failure from the Fed chief to push back against bets on a ‘dovish pivot’ could set the stage for a rally in stocks to erase losses by year-end.

“The S&P 500 will move up substantially if and when they [the Fed] signal a pause and sustain a rally that could recover all the losses by the end of the year,” Jimmy Lee, the founder and CEO of The Wealth Consulting Group told Investing.com in a recent interview.

The path of inflation holds sway over whether a Fed pause will become reality and potentially help the broader market erase its nearly 12% loss by the end of the year.

Recent reports have pointed to easing in the pace of inflation that is likely to continue, according to Lee.  Spending on services may slow as “the high pricing in travel and leisure industries [ease] after the summer,” Lee says, adding further downside pressure on inflation.

Others, however, aren’t so sure and point to the tight labor market that will boost wage pressures, while other drivers including high rental rates continue to fuel inflation.

“I fear inflation is going to remain hot for a while,” John Luke Tyner, Portfolio Manager at Aptus Capital Advisors told Investing.com on Thursday.

“With 5% or 6% wage growth and maybe 6% growth in owners’ equivalent rent as well as the other rental numbers that tack onto CPI, I think it's going to be awfully hard for the Fed to get inflation back down to 2%,” Tyner added.

'Fed Speak' Muddies Rate Hike Debate

The recent messaging from Fed members hasn’t helped clear up expectations on whether the central bank is considering a pivot in policy.

Some members of the Fed appear to be pushing for the central bank to deliver another 75-basis-point rate hike next month, while others are striking a more cautious tone.

St. Louis Fed president James Bullard on Thursday backed the idea of another 75 basis-point rate hike to take the Fed funds rates to a level that will put significant downward pressure on inflation.

Kansas City Fed President Esther George, however, appeared cautious on larger hikes, saying the central bank must be “very mindful” of the lagged impact of its policy decisions on the economy.

The minutes of Fed’s July meeting, released earlier this week, weren’t conclusive and “contained their usual ‘something for everyone,’” National Bank Australia said in a recent research note.

The current odds are slightly skewed toward a 0.75% rate hike at the September meeting, according to Investing.com’s Fed rate Monitor Tool. The fed funds rate is expected to peak at 3.67% in March 2023, with about 40 basis point of cuts, thereafter, in 2023. 

Powell to Stick or Twist?

But Powell can reset market expectations on a Fed pivot when he delivers a speech next week at the annual Jackson Hole symposium on Aug. 25-27.

The Fed chief’s remarks will be closely watched for clues on whether the slowing in the economy is starting to dilute the Fed’s resolve to continue front loading rate hikes that some argue are needed to bring down inflation.

Beyond rate hikes, Powell may also turn focus to the Fed’s balance sheet reduction, or quantitative tightening, plan that could be uses as “more of impactful lever to tighten conditions rather than continuing to raise rates at the current velocity,” Tyner added.

If the Fed chief, however, doesn’t push back sufficiently against the growing narrative of a Fed pivot, it risks higher for longer inflation that would spark a surge in long-end Treasury yields and put rate-sensitive sectors of the market such as tech back in the crosshairs.

“If the Fed pivots before inflation is fixed, I think that you see a massive rise in long term bond yields. That's what scares me away from this peak yield narrative,” Tyner said.

A Dovish Powell Could Set Stage for Stocks to Erase All Losses by Year-End
 

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Comments (70)
shawn holt
shawn holt Aug 29, 2022 8:16AM ET
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will age well
Mangalavati Citra
Mangalavati Citra Aug 24, 2022 2:03AM ET
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Perhaps 🤔 Powell will go for 0.60%. 0.50 is too low and 0.75 is too high.
Bhagwan Dass
Bhagwan Dass Aug 22, 2022 12:10PM ET
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playing game with poor and middle class people of world.God will punish you
Rise Unlimited
Rise Unlimited Aug 22, 2022 3:38AM ET
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People are broke and its known banks love it.
Russell Disch
Russell Disch Aug 22, 2022 12:20AM ET
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50 then 50 till inflation comes down economic challenges ahead with companies cutting benefits to offset wages continued
Notvery Goodathis
Peteymcletey Aug 21, 2022 11:29PM ET
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Given it'll be 2 months between hikes - shouldn't the 75 be guaranteed at this point?
Rise Unlimited
Rise Unlimited Aug 21, 2022 11:29PM ET
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Nahhhh they do tge 3 for 1, 2 for 1 specials then liquidate. Consumer debt and production is screwed.
Russell Disch
Russell Disch Aug 21, 2022 11:26PM ET
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Jimmy Lee says who cares futures changed on this garbage news on hearsah wow retail investors needA valuable listen this week
Gershom Zvi
Gershom Zvi Aug 21, 2022 9:59PM ET
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Right now September is month of big sell off ahead be prepared
Stephen Fa
Stephen Fa Aug 21, 2022 9:33PM ET
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All we will hear this week is "we're committed to bringing inflation down and we're data dependent."
George Pichurov
George Pichurov Aug 21, 2022 7:28PM ET
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"Fed President Esther George, however, appeared cautious on larger hikes, saying the central bank must be “very mindful” of the lagged impact of its policy decisions on the economy." Well, they should've been mindful when pumping the shеt.
 
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