The Federal Reserve struck a slightly hawkish tone on Wednesday, signaling concerns about both rising inflation and slowing economic growth. Still, this did little to alter widespread market expectations that the Fed will cut interest rates several times this year, as tariffs continue to pose a significant threat to the economy.
While the Fed’s decision was largely in line with forecasts, its statement and Chair Jerome Powell’s remarks came across as “a bit more hawkish than expected,” according to analysts at Sevens Report. Policymakers emphasized the dual challenges of stubborn inflation and increasing unemployment.
Investors had been hoping the Fed would put greater emphasis on the risk of slowing growth, which could have hinted at an earlier timeline for rate cuts. Instead, the Fed balanced both risks, signaling that it’s in no rush to ease rates.
Despite this, markets are still betting on multiple rate cuts in 2025. “Neither the decision nor Powell’s comments shifted expectations for three (possibly four) rate cuts, with July now seen as the likely starting point,” the report noted. The Fed’s cautious, wait-and-see stance has not yet derailed the market’s optimistic view that upcoming rate cuts will help shield the economy from the fallout of tariffs and broader policy uncertainty.
However, if the Fed delays cutting rates for too long, it raises the risk that tariffs could push the economy into a recession or a sharp downturn, fueling investor concerns of a contraction driven by trade tensions and policy missteps.
For now, the Fed’s patience is seen as a “slight negative,” suggesting the S&P 500 is likely to stay stuck in its recent trading range.
“The market is looking for the Fed to step in and support the economy — if that support doesn’t materialize, and rates remain unchanged, the outlook for the economy worsens slightly compared to before.”
