Federal Reserve Chair Jerome Powell sounded hawkish on Wednesday, stating it wouldn’t be appropriate for the central bank to lower the policy rate until it has more confidence in inflation moving sustainably toward the 2% target. Despite Powell’s stance, Tom Lee, a bullish analyst at Fund Strat, disagreed and suggested the possibility of more than three cuts this year.
Powell emphasized a data-dependent approach, noting, “Given the strength of the economy and progress in inflation so far, we have time to let the incoming data guide our decisions on policy.”
Appearing on CNBC, Lee attributed the fading hopes of rate cuts to January and February’s global inflation acceleration, which he deemed a statistical aberration due to poor seasonal adjustments.
“There’s just some really poor seasonal adjustment … that take place,” he said.
Lee pointed out the significant drop in March consumer price inflation reports from Europe compared to the preceding months, with eurozone inflation reverting to 2.4% in March. He anticipated the U.S. March inflation report due on April 10 to provide further clarity.
Lee suggested that by the Fed’s June meeting, with data from three monthly inflation reports, markets may become more confident in falling inflation.
“I think by then markets are gonna be more confident that inflation is falling and the three cuts actually may be too low. You know it is possible there is more than three cuts this year,” he added.
Steve Cohen, owner of the New York Mets and hedge fund manager, in a separate interview, expressed skepticism about the Fed’s ability to bring inflation toward its 2% goal, citing prevalent “under-employment.” Despite anticipating rate cuts due to contained inflation, he emphasized the potential challenges.
Hedge fund manager David Einhorn predicted that the Fed might implement fewer cuts than market expectations, possibly even maintaining rates this year amidst concerns of inflation reacceleration.
See Also: Best Inflation Stocks
After the COVID-19 stimulus-induced inflation spike, the Fed initiated Fed funds rate hikes in March 2022, resulting in interest rates reaching a 22-year high of 5.25%-5.50%. Despite warnings about elevated rates potentially causing a recession, the economy has remained robust, supported by strong consumer spending and labor market activity.
The stock market suffered in 2022 amid the rate hikes. It was then the companies resorted to resuscitation efforts to thrive in a high-interest rate environment and the financial markets recovered in 2023, ending the year with solid gains. The buoyancy continued into 2024, as investors began to bake in at least three rate hikes this year. The major averages all hit record highs in 2024 and currently trade just shy of those levels.
The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the performance of the broader S&P 500 Index, hit a record intraday high of $524.61 on March 28 and a record closing high of $523.17 a day before. On Wednesday, the ETF closed at $519.41, up 0.11%.
The futures market is pricing in a 61.5% probability of a 25 basis point cut at the June Federal Open Market Committee meeting. The upcoming inflation reports may give a clear picture of whether inflation continues to remain sticky or will get back on a downward trajectory.
The iShares TIPS Bond ETF TIP, an ETF tracking the investment results of an index composed of inflation-protected U.S. Treasury bonds, ended Wednesday’s session unchanged at $106.68, according to Benzinga Pro data.
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