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Fed Chairman Jerome Powell thinks we can avoid recession as he sets a new upbeat tone


Stock markets jumped on Wednesday after Federal Reserve Chairman Jerome Powell said inflation was falling and he believed the United States would avoid a recession this year.

“Now we can say that for the first time I think the process of reducing inflation has begun,” he told reporters, adding that he expected US economic growth to be positive. this year, even if it drops “at a slow pace”.

Fed officials are often careful to never make big, obvious recession predictions, but Chairman Powell’s past press conferences have often included language intended to downplay investor enthusiasm. investment and lowered expectations—in one famous example, he warned that the Fed was ready to “bring some pain” for households and businesses. But this time it’s different.

Although the Fed raised rates by 25 basis points on Wednesday, marking its eighth rate hike in less than a year, BMO Wealth Management chief investment strategist Yung-Yu Ma, said the Fed chair’s statements show that “extreme aggression” is behind us and that “elements for a soft landing are in place.”

“Chairman Powell played his last card and showed that he believes in the path to reducing inflation to 2% without a significant economic slowdown or a substantial increase in unemployment,” Ma said. “. Luck.

And Charlie Ripley, senior investment strategist for Allianz Investment Management, argues that Powell’s comments are evidence that the rate hike is coming to an end.

“The deceleration of rate hikes is a clear sign that the Fed is getting comfortable with the idea that regulatory policy for the economy is finally starting to work,” he said. Luck.

The S&P 500 ended Wednesday with a gain of more than 1% after Powell’s speech, with the index heavy on technology. Nasdaq 2% increase. The Euro is also soaring against the US dollar, a sign that investors consider Powell’s comments dovish.

David Keller, director of market strategy at Stockcharts.com, a technical analysis platform, says Luck that stock market investors viewed Powell’s statement as confirmation that the Fed’s rate hikes “are starting to have a real impact on inflation,” prompting many valuations to “land on the ground.” soft without recession”.

Despite his upbeat tone, Powell said that further rate hikes are still appropriate, with the Fed funds rate most likely to peak at 5.00% and 5.25% this year. And he added that he does not expect a rate cut this year as annual inflation remains “very hot”.

“It would be too early to claim victory, or think we’ve actually achieved this,” he said.

“We raised rates by 4.5 percentage points and we are talking about a few more rate hikes to get to what we consider appropriate restraint.”

But despite Powell’s careful hedging, some investors remain bullish. Jay Hatfield, Managing Director at Infrastructure Capital Advisors, says Luck that he expects the Fed chair to pause rate hikes this year as inflation falls faster than expected — and that will allow stocks to rise.

“We continue to predict that the S&P will end the year above 4,500 as the Fed pauses rate hikes after the May meeting and the economy demonstrates resilience thanks to post-Pandemic headwinds,” he said. .

However, not everyone remembers Powell’s relatively positive performance in the press conference. Ronald Temple, director of market strategy at Lazard, warned that investors’ reaction to Powell’s speech could be overly optimistic.

“I believe the markets are still too dovish about how high interest rates will go and how long they will stay there. The more markets turn against the Fed, the tighter conditions will have to be in place to tame inflation,” he said. Luck.

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