The Federal Open Market Committee (FOMC) convened for its two-day meeting this week. Following the highly-anticipated gathering, the FOMC released its latest statement, affirming that it would keep rates steady, leaving the federal funds rate at a range of 5.25% to 5.50%.
Of key importance to the financial world was the update of the “dot plot” survey, a quarterly graph that reveals the Federal Reserve officials’ predictions about future interest rates for the remainder of the year. In the most recent update from March, the forecast included three rate cuts.
However, a spate of robust inflation reports caused Wall Street to anticipate fewer rate cuts. This prediction was validated when the latest dot plot was made public yesterday.
The updated dot plot reveals that four officials believe there will be no rate cuts this year, seven forecast one cut, while eight members still anticipate at least two cuts before the close of 2024. If you take the median of these three differing views, it points to one rate cut. The Fed is also now predicting four rate cuts next year, marking an increase from the three cuts forecasted in the March dot plot. This appears to indicate that critical decisions are being pushed further into the future.
Chairman Jerome Powell fell short of offering Wall Street any additional clues as to when the cuts might occur this year, instead reiterating that the Fed’s decisions will continue to be “data dependent.”
Personally, I expressed my disappointment in the FOMC statement and the latest dot plot. Although the Fed recognized that inflation is on the rise, officials have not lowered their forecast for the Personal Consumption Expenditures (PCE) index. The Federal Reserve also increased its unemployment estimate to 4.1%.
If the control of the Fed were up to me, I’d implement rate cuts in late July, September, and immediately after the election. This would ensure three rate cuts within the year.
However, the recent FOMC statement and dot plot is not the only noteworthy economic news this week…
Wednesday morning saw the release of the latest Consumer Price Index (CPI) numbers. The headline inflation remained unchanged in May, boasting a year-over-year increase of 3.3%, compared to April’s rise of 0.3%. Economists were predicting an increase of 0.1% in May and a 3.4% rise over the past 12 months.
The core CPI, excluding food and energy, showed a 0.2% increase in May and is up 3.4% year-over-year. This compares to a previous annual rise of 3.6%. The slight improvement in year-over-year core inflation was slightly below economists’ predicted increase of 3.5%.
This morning also brought the release of the Producer Price Index (PPI). The headline PPI for May surprisingly dropped by 0.2%, considerably lower than the 0.1% increase economists were expecting. This is also a drop from April’s 0.5% increase. The PPI rose 2.2% year-over-year.
In contrast, the core PPI, excluding food, energy and trade, remained flat in May. Economists had hoped for a 0.2% increase, as opposed to April’s 0.4% rise. Over the year, core PPI increased by 3.2%.
A significant contributor to the unexpected decline was a 4.8% drop in energy. The Bureau of Labor and Statistics reports, “Nearly 60 percent of the May decrease in the index for final demand goods can be traced to a 7.1-percent decline in prices for gasoline.” Wholesale food prices dipped 0.1% while egg prices plummeted a staggering 35%.
Chairman Powell mentioned in his press conference that the FOMC was pleased with the CPI report, adding that if the current trend persists, the Fed could implement rate cuts. The PPI report’s results should further boost the Fed’s mood.
It’s worth noting that the Fed’s inflation target stands at 2%, and this week’s inflation readings suggest that both consumer and wholesale inflation are gradually creeping towards this goal.
The situation at hand is relatively straightforward – it’s every stock for itself. A stock’s success hinges on stellar earnings. As we near the conclusion of June and brace for the start of quarter-end window dressing — when institutional fund managers spruce up their portfolios for quarterly reviews — this will be increasingly crucial.
Fund managers will likely be drawn to the best-performing, fundamentally superior stocks to dress up their portfolios. I’m confident that they will turn to Growth Investor stocks, characterized by an average forecasted sales growth of 17.3% and an astonishing 182.8% average forecasted earnings growth.
No matter what unfolds with the Fed’s rate decisions, I remain confident that Growth Investor stocks will continue to lead the market and consistently prosper.
Let us know what you think. Please share your thoughts in the comments below.
