Fed chair Powell: delaying rate cuts ‘could weaken economic activity’

S&P 500 is gaining at writing after Jerome Powell signalled the Federal Reserve may soon decide in favour of cutting interest rates. 

The head of the U.S. central bank indicated the need for initiating rate cuts as he testified to Capitol Hill on Tuesday. 

The benchmark S&P 500 index is currently up about 18% versus the start of 2024. 

Jerome Powell testifies to Capitol Hill

Chair Powell reiterated that progress in lowering inflation has been rather encouraging recently and told the U.S. government officials on Tuesday:

Reducing policy restraint too late or too little could unduly weaken economic activity and employment.

His remarks arrive a couple weeks after the Bureau of Economic Analysis reported the core personal consumption expenditures price index at 2.6% for May – in line with expectations. 

PCE is the Fed’s favoured metric for inflation versus the CPI. 

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Markets expect two rate cuts in 2024

The U.S. overnight borrowing rate is currently in the range of 5.25% and 5.5% – highest since the early 2000s. 

Markets expect the central bank to announce its first rate cut in September and another before the start of 2025. Members of the Federal Open Market Committee, however, signalled only one rate cut this year in June. 

Lower rates will likely be a further catalyst for U.S. stocks in 2024. In fact, John Stoltzfus of Oppenheimer now expects the S&P 500 to hit the 5,900 level this year. 

His recently raised year-end target suggests potential for another 6.0% gain from here. 

Why is Oppenheimer bullish on S&P 500

The Oppenheimer chief strategist also cited the expected rate cuts for his super bullish view on the benchmark index for 2024. His recent research note to clients reads:

We expect the Fed to cut once or twice late in Q4 as a good faith down payment for Main Street and Wall Street signalling the central bank is getting closer to an end of the current rate hike cycle if not quite there yet.

What has contributed and will continue to help the U.S. stock market remain strong moving forward is the broader commitment to artificial intelligence, he added. 

Focus on AI could be a meaningful tailwind for 11 S&P 500 sectors, as per John Stoltzfus. His year-end target on the benchmark index is currently the second-highest on Wall Street. The highest being Stifel, Nicolaus & Co that expects SPX to hit 6,000 before the end of 2024. 

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