The Fed's inflation war isn't close to over

Top Wall Street strategists react to the updated dot plot and policy decision

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Wednesday was a busy day for markets. We saw CPI come in a touch cooler than expected, the Fed published its dot plot and left interest rates unchanged, and Jerome Powell gave a press conference.

On top of that, the S&P 500 closed above 5,400 for the first time ever.

Today’s edition breaks down reactions across Wall Street.

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A ‘sea-change’ in the Fed

The Fed’s war on inflation isn’t ending any time soon.

To no surprise, the Federal Reserve concluded its two-day meeting Wednesday by leaving interest rates unchanged in the 5.25% to 5.5% range, a two-decade high.

During the press conference, Jerome Powell highlighted that the economy continues to grow at a good clip, and the labor market looks similar to pre-pandemic days.

“We’re kind of seeing what we wanted to see, which was a cooling in demand,” he said.

The dot plot, meanwhile, showed central bankers have turned more cautious compared to some months ago.

“In a sea-change among [Fed] participants, none expect more than two cuts this year,” Morgan Stanley economist Ellen Zentner said.

At the start of the year policymakers forecasted three rate cuts in 2024.

As of Wednesday, the median projection dipped to one, with a more aggressive path coming next year.

In 2025, officials anticipate five interest rate cuts for a total of 1.25 percentage points.

Betting markets, per Kalshi, have gone from expecting four cuts in January to one cut.

“The Fed is not looking for a more restrictive monetary policy,” said eToro analyst Bret Kenwell. “But rather, looking at when it will be appropriate to lower rates, reiterating the ‘when not if’ mentality.”

Remember, Powell & Co. continue to balance two key risks:

  1. High borrowing costs bringing pain to banks, businesses, and households

  2. Cutting rates acts as jet fuel for portfolios and spending, reigniting inflation

"The Fed’s outlook seems equal parts caution and capitulation,” said Robert Frick, an economist with Navy Federal Credit Union.

The central bank is increasingly pushing back on markets’ rate cut expectations, Frick said, which suggests caution.

At the same time, the Fed seems to have come to terms with inflation persisting above its 2% target for some time longer, suggesting capitulation.

Ultimately, Powell maintained cuts are indeed on the way.

He noted that no one on the Fed committee has a rate hike as their base case — which at least seemed to cheer up stock market investors Wednesday.

Cooler than expected CPI reading earlier that morning didn’t hurt either.

The S&P 500 added 0.9%, while the Nasdaq Composite gained 1.5%.

“The data have moved in their favor and tail risks to the policy path have diminished,” wrote Bank of America economist Michael Gapen in a note to clients.

“This Fed will be reactionary and will ease when the inflation data allow.”

The Fed now expects one cut in 2024. How does that change your outlook for the S&P 500? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

*Data as of Wednesday 9 p.m. ET

Elsewhere:

📉Inflation held steady in May. CPI clocked in flat compared to the prior month, cooler than the expected 0.1% gain, the Labor Department reported Wednesday. On the year, it increased 3.3%. Here’s Goldman Sachs’ reaction: “This morning’s CPI report supports our view that normalizing the Fed funds rate will soon become reasonable, and we continue to expect the first cut in September.” (CNBC)

🍎It’s Apple vs. Microsoft. The two tech behemoths are neck and neck for world’s largest company. Apple’s meteoric gains this week — following its splashy AI announcements — have lifted its market cap to $3.27 trillion. Microsoft stock gained 2% on Wednesday, bringing its market cap to $3.28 trillion. (WSJ)

📊President Biden didn’t get good news from Powell. The Fed is not in a rush to cut interest rates, which doesn’t help Biden’s re-election bid. While policymakers indicated that inflation does seem to making progress, it is likely not cooling fast enough to satisfy the White House or its constituents. (Bloomberg)

Rapid-fire:

  • Oracle stock hit a record high as it inks deals with Microsoft and Google (Investopedia)

  • Virgin Galactic announced a 1-for-20 reverse stock split and shares tanked nearly 6% (Reuters)

  • GameStop could make more money than it has in recent quarters by just sitting on its $4 billion cash pile (Business Insider)

  • Trump met with bitcoin mining companies and executives at Mar-a-Lago (Bloomberg)

  • A Financial Times poll showed more Americans trust Trump over Biden as far as who can steer the economy better (FT)

  • An ether ETF could prove more important than the bitcoin ETF (CoinDesk)

Interview:

I sat down with investor Anthony Pompliano — co-founder of Opening Bell Daily — to have a conversation about interest rates, the Fed, Trump and bitcoin. You can see the full interview here:

Last thing:

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