Markets Caught Between Fed Inaction and Trade Turmoil
Monetary Policy on Hold Amid Inflation and Employment Risks
The Federal Reserve held rates steady on Wednesday, stating that both inflation and unemployment risks have increased. As Reuters reports, this stance leaves the Fed in “no hurry to take any interest-rate actions for the foreseeable future,” rendering the “appropriate response for monetary policy” unclear.
Even though recent economic data has not shown a clear slowdown, investors are bracing for the potential impact of President Donald Trump’s “sweeping tariffs,” while the “trade backdrop remains in flux.” The uncertainty has led some to shift focus toward inflation-protected assets and more resilient stocks.
Investors Left Without Clear Direction
“There’s nothing investors like less than uncertainty and the Fed isn’t in a position to offer them certainty,” said Josh Jamner, senior investment strategy analyst at ClearBridge Investments.
Jerome Powell acknowledged this at the press conference, admitting that “trade policy remains a source of uncertainty that affirms the Fed’s need to maintain a wait-and-see approach.”
“Powell is like every other investor: just waiting to see how this plays out,” added Robert Christian, head of Absolute Return Portfolio Management at Franklin Templeton Investment Solutions.
Rate Cuts Still Expected, But Not Urgently
Though the Fed’s benchmark rate remains at 4.25% to 4.5% in 2025 after a full percentage point of cuts last year, investors still broadly expect more easing. Futures markets pointed to “about three 25-basis-point reductions by December,” with July flagged as the likely point for the next move.
Marta Norton of Empower said, “The projected further easing stems from the expectation that the hit to economic growth will outweigh any push higher in inflation.” Still, she cautioned: “I do think we have to allow for a wider range of possibilities, particularly the idea that inflation could surprise to the upside.”
September Seen as a Realistic Pivot Point
“It would take some dramatic deterioration for the Fed to start moving before September,” said Ed Al-Hussainy of Columbia Threadneedle Investments. “And then by September, we’ll have a little bit of a better sense of at least the direction of travel.”
Following a strong U.S. jobs report last Friday, expectations for near-term rate cuts faded. Data showed that payrolls rose by a stronger-than-expected 177,000 in April.
Trade, Fiscal Policy Keep Volatility Elevated
In addition to trade uncertainty and monetary ambiguity, fiscal policy remains a wildcard. Jeffrey Palma of Cohen & Steers pointed out, “There is uncertainty about fiscal policy, including how the federal budget process will shake out.”
“All of those suggest that market volatility stays somewhat elevated going forward,” he said.
The market reaction to the Fed’s announcement was muted. The S&P 500 rose by 0.4%, led by chipmakers following reports that the administration may ease curbs on AI chips. The 10-year Treasury yield fell slightly to 4.27%.
The Cboe market volatility index dipped to 23.55 but remained above its long-term median of 17.6, reflecting lingering investor anxiety.
Investors Shift Toward Resilience and Real Assets
Palma noted that his firm is recommending broader diversification, including “real assets” like real estate, infrastructure, and natural resources, which may act as inflation buffers.
Josh Jamner echoed this approach, suggesting investors seek “shares of companies that either have the flexibility to adjust to changing economic environments or have competitive advantages that insulate them from economic vagaries.”
Financial advisers appear to have anticipated Powell’s vague stance. Rafia Hasan of Perigon Wealth Management said, “That is what has the most potential to have a real impact on the markets,” referring to potential trade deals now in focus.
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