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Tag: fed rate cuts

  • ‘Inflation will surprise to the downside in 2026’: Why Wall Street expects juiced economy, stock gains this year

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    Investors may be “having a cake and eating it” in 2026, with Wall Street strategists predicting stock market gains driven by Fed rate cuts, tax incentives, and lower-than-expected inflation.

    As Wall Street prepares for this week’s highly anticipated monthly Consumer Price Index report, which is expected to stay unchanged from the prior month at an annual increase of 2.7%, strategists are pointing to cheap oil prices and easing shelter costs as a sign that prices may be cooling.

    “Our view is that inflation will surprise to the downside in 2026,” Longview Economics global economist and chief market strategist Chris Watling told Yahoo Finance last week.

    It’s not all good news on the economic front. Last month’s employment report, released on Friday, showed the economy added fewer jobs than expected to cap a weak 2025.

    But a cooling labor market gives the Federal Reserve reason to cut rates this year, which could push bond yields lower. That’s especially true if President Trump’s pick to replace Fed Chair Jerome Powell when his term ends in May shifts the central bank in a more dovish direction.

    Lower yields mean cheaper borrowing costs, which can boost economic activity and keep corporate capital expenditures high.

    “You could really get an economy pretty juiced as we go through this year, because you can have the capex, and you can have the sort of consumption starting to improve as housing fixes up and bond yields move lower,” Watling added. “This is what I call having a cake and eating it.”

    Wall Street is already spotting “green shoots” as companies take advantage of the depreciation tax benefits from Trump’s One Big Beautiful Bill (OBBB) Act, signed into law in July.

    “If you are a CFO of a company, and the OBBB allows you to get 100% depreciation for capex in one year … you will absolutely accelerate as much of your multi-year capex spend into 2026 as possible, or risk getting fired for missing those tax benefits,” Nomura Securities equity derivatives analyst Charlie McElligott wrote in a note last week.

    Economic growth happens even as affordability challenges maintain a K-shaped divide, with the bottom half of consumers struggling to cover basic needs. In a nod to affordability ahead of the midterms, Trump recently criticized firms like Blackstone for buying single-family homes as investments, a hot-button issue for voters.

    Read more: What is a ‘K-shaped’ economy, and what’s causing the divide?

    Rents have started to ease after years of relentless growth. That’s one reason Goldman Sachs expects the Personal Consumption Expenditures (PCE) index to trend toward the Fed’s 2% target. The firm also noted that the one-time price bump from last year’s tariffs is fading, which should further ease inflation.

    “Healthy economic and revenue growth, continued profit strength among the largest US stocks, and an emerging productivity boost from AI adoption should lift S&P 500 EPS by 12% in 2026 and 10% in 2027,” Goldman’s Ben Snider wrote on Wednesday.

    The latest data shows worker productivity in the third quarter grew at its fastest clip in two years, as businesses spent heavily on AI and pulled back on hiring.

    That productivity boost is expected to broaden the stock market rally, as the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) touched all-time highs last week. Materials (XLB), Industrials (XLI), Energy (XLE), and Consumer Discretionary (XLY) were some of the leading sectors as investors trimmed tech exposure.

    “We’re producing a lot more with less people,” RCM chief economist Joe Brusuelas told Yahoo Finance on Friday, though he believes the full impact of AI is still a couple of years away.

    Wall Street strategists predict stock market gains in 2026 driven by Fed rate cuts, tax incentives, and lower-than-expected inflation. (AP Photo/Seth Wenig) · ASSOCIATED PRESS

    Against that backdrop, strategists are watching for sectors and companies positioned to benefit from leaner headcounts and growing AI adoption.

    “Pay attention to high human capital businesses — so let’s say finance companies, retail companies, consulting, accounting type businesses,” Clark Capital CIO Sean Clark told Yahoo Finance recently.

    “Quality value companies are now starting to experience the benefit of this AI revolution, driving earnings, driving productivity, [and] driving margins higher,” he added.

    However, some warn that if the labor market is replaced by AI too quickly, it could pose a sudden threat to the broader economy.

    “We term it as the dark side of AI,” Tim Urbanowicz, chief investment strategist at Innovative Capital Management, told Yahoo Finance. Urbanowicz estimates that 15%-20% of the layoffs at the end of last year were related to artificial intelligence.

    “If you start to see the jobs market or labor market starting to be replaced by AI in a major way, we think that becomes problematic,” he added.

    StockStory aims to help individual investors beat the market.
    StockStory aims to help individual investors beat the market.

    Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.

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  • Powell signals Federal Reserve to move slowly on interest rate cuts | Long Island Business News

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    In Brief:
    • Powell warns against cutting rates too aggressively, citing risks
    • Trump appointees Miran and Bowman push for faster, deeper cuts
    • Fed cut its key rate to 4.1% last week, first reduction this year
    • Divisions deepen within Fed as job market softens and inflation lingers

    Chair on Tuesday signaled a cautious approach to future interest rate cuts, in sharp contrast with other Fed officials this week who have called for a more urgent approach.

    In remarks in Providence, Rhode Island, Powell noted that there are risks to both of the Fed’s goals of seeking maximum employment and stable prices. But with the rate rising, he noted, the Fed agreed to cut its key rate last week. Yet he did not signal any further cuts on the horizon.

    If the Fed were to cut rates “too aggressively,” Powell said, “we could leave the inflation job unfinished and need to reverse course later” and raise rates. But if the Fed keeps its rate too high for too long, “the labor market could soften unnecessarily,” he added.

    Powell’s remarks echoed the caution he expressed during a news conference last week, after the Fed announced its first rate cut this year. At that time he said, “it’s challenging to know what to do.”

    The careful approach he outlined is quite different from that of some other members of the Fed’s rate-setting committee, particularly those who were appointed by President Donald Trump, who are pushing for faster cuts. On Monday, said the Fed should quickly reduce its rate to as low as 2% to 2.5%, from its current level of about 4.1%. Miran was appointed by Trump this month and rushed through the Senate, taking his seat just hours before the Fed met last Tuesday. He is also a top adviser in the Trump administration and expects to return to the White House after his term expires in January, though Trump could appoint him to a longer term.

    And earlier Tuesday, Fed governor also said the central bank should cut more quickly. Bowman, who was appointed by Trump in his first term, said inflation appears to be cooling while the job market is stumbling, a combination that would support lower rates.

    When the Fed cuts its key rate, it often over time reduces other borrowing costs for things like mortgages, car loans, and business loans.

    “It is time for the (Fed) to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility,” Bowman said in a speech in Asheville, North Carolina. “We are at serious risk of already being behind the curve in addressing deteriorating labor market conditions. Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.”

    Yet Powell’s comments showed little sign of such urgency. Other Fed officials have also expressed caution about cutting rates too fast, reflecting deepening divisions on the rate-setting committee.

    On Tuesday, , president of the Federal Reserve’s Chicago branch, said in an interview on CNBC that the Fed should move slowly given that inflation is above its 2% target.

    “With inflation having been over the target for 4 1/2 years in a row, and rising, I think we need to be a little careful with getting overly up-front aggressive,” he said.

    Last week the Fed cut its key rate for the first time this year to about 4.1%, down from about 4.3%, and policymakers signaled they would likely reduce rates twice more. Fed officials said in a statement that their concerns about slower hiring had risen, though they noted that inflation is still above their 2% target.

    In a question and answer session, Powell said that tariffs, so far, have had a fairly limited impact on inflation, though he suggested that could change.

    He said U.S. companies are paying most of the tariffs, which contradicts Trump administration claims that overseas companies are shouldering the payments. But he said that the pass-through of tariff costs to consumers “has been later and less than we expected.”

    He also said the Fed continues to tune out attacks against it and added that the Fed does not consider when making its decisions. Powell and the Fed have been under steady attack from Trump, though Powell did not name him.

    “Whenever we make decisions, we’re never, ever thinking about political things,” Powell said. “Truth is, mostly people who are calling us political, it’s just a cheap shot. … We don’t get into back and forth with external people.”


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    The Associated Press

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