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Our long national wait is nearly over: Fed Chair Jerome Powell will take the mic on Friday and let everyone know what the central bank is thinking about interest rates.
In the world of markets, it doesn’t really get bigger than this. A spate of big-box retail earnings came and went this week, as did minutes for the July FOMC meeting, with barely a rumble from investors.
They instead remained laser-focused on the prospect of an interest-rate cut in September — which has been priced in with near-certainty for weeks — and also on what Powell seems prepared to do through year-end.
It will come amid a confusing landscape. The labor market is in dire straits, but GDP has been fine. Inflation has been kept relatively in check, at least for consumers. Wholesale producers? Not so much.
Detailed below are three possible outcomes for Powell’s address on Friday, as well as what markets are likely to do in each instance.
Scenario 1: More hawkish than expected
The dreaded outcome: Powell signals a rate path that’s more conservative than what people expect.
As it stands now, the likeliest outcome being priced in by investors is two rate cuts by year-end (47%). Bullish investors are banking on a lower cost of capital boosting future earnings growth, which has historically been the primary driver of stock gains.
How stocks could react:
Despite some selling this past week — especially in AI and chip names — the market is still largely priced to perfection, and within shouting distance of record highs.
That leaves it vulnerable to any recalibration in rate-cut expectations. If investors see companies getting less access to capital they can then use to reinvest, make acquisitions, and generally boost bottom lines, they could trim positioning and send the market tumbling.
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Scenario 2: More dovish than expected
The best-case scenario: Powell signals a rate path that’s even more accommodative than what people expect.
How stocks could react:
This would mean further jet fuel for the future earnings growth of major companies, an unabashedly bullish prospect that would likely push stocks higher. Unfortunately, this is probably the lowest-likelihood outcome.
One additional caveat is that — while more rate cuts would be positive — there could be some rotation under the surface of the stock market. With the field for stronger earnings revisions leveled by easier access to capital, it’s possible that the mega-cap tech names that have led market gains could fall out of favor.
It’s something we saw earlier this week when the tech-heavy Nasdaq 100 absorbed disproportionate losses, relative to the rest of the market.
Scenario 3: Powell meets expectations
The boring scenario: Powell does exactly what everyone expects him to. As it stands now, that would mean confirming a rate cut in September, and then another one by year-end.
How stocks could react:
Such a reaction could range from tepid to negative. In theory, if everything goes according to plan, stocks stock be relatively unchanged. But it’s possible investors will “sell the news,” implying that such an outcome was already properly priced in.
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