Stocks Erase Gains as Powell Flags Inflation Risks: Markets Wrap

(Bloomberg) — A rally in stocks fizzled out after Federal Reserve Chair Jerome Powell warned that tariff-driven economic uncertainty and inflation risk continued to complicate the central bank’s bid to ease monetary policy in earnest. Gains in bonds waned. The dollar barely budged.

Equities closed little changed, with the S&P 500 ending below 6,000 after briefly crossing that mark. Powell noted that increases in tariffs are likely to boost prices, while adding that the effects on inflation could be more persistent. He also declined to say if he’ll stay on after his term ends. Treasury two-year yields, which are more sensitive to imminent Fed moves, almost erased a decline that had earlier reached seven basis points.

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“Ultimately, the cost of the tariff has to be paid and some of it will fall on the end consumer,” Powell said. “We know that because that’s what businesses say, that’s what the data say from the past.” “We know that’s coming and we just want to see a little bit of that before we make judgments prematurely,” he added.

The Fed’s decision to hold rates steady – coupled with Powell’s latest warning on tariffs – underscores the delicate balance facing policymakers guiding the economy toward continued expansion. While officials continued to pencil in two rate cuts in 2025, they downgraded their estimates for  growth this year while lifting forecasts for unemployment and inflation. 

“Powell played it safe,” said Haris Khurshid, chief investment officer at Karobaar Capital in Chicago. “They’re sticking to two cuts for now, but clearly rattled by tariffs. No urgency to move. It’s a tough spot: growth slowing, inflation lingering, and geopolitical risk heating up.”

Traders also kept a very close eye on geopolitics, with President Donald Trump saying he’d hold another meeting Wednesday to discuss the conflict in the Middle East. Asked earlier in the day if he was moving closer to bombing Iran, Trump said “I may do it. I may not do it.” 

“They are clearly in wait-and-see mode,” said Chris Zaccarelli at Northlight Asset Management. “They are sitting on their hands, waiting to see if tariffs increase inflation or the jobs market starts to falter, and whichever part of their dual mandate is impacted first will likely guide whichever direction they take.”

While the median expectation for two rate cuts in 2025 didn’t change, a number of officials lowered their projections. Seven officials now foresee no rate cuts this year, compared with four in March. Two others pointed to one cut this year.

“Much like the tariff talk, the Fed has pivoted to a more of a kick the can down the road narrative as uncertainty may have diminished, but it’s still elevated according to their terms,” said Jay Woods at Freedom Capital Markets. “Overall, the Fed’ss dual mandate is still in question. Expect them to go ‘one meeting at a time’ until there is more certainty with tariffs.”

To Seema Shah at Principal Asset Management, the Fed’s decision to keep 50 basis points of cuts for this year despite the higher inflation outlook is somewhat surprising. 

“Yet, any change in this year’s dot plot would have been interpreted as a signal that the Fed has a clear plan about its future policy path, when actually the likely truth is that, with the economic outlook still very much shrouded in uncertainty, the Fed is unsure of how things will pan out,” she said. 

Shah expects the Fed will ultimately remain on hold until the fourth quarter, with just one 25 basis-point cut this year.

At Strategas, Don Rissmiller says that with inflation likely to pick up over the summer, the next opportunity to cut rates could be in fact in the fourth quarter.

“The Fed does not want to move preemptively given how fluid the US economic situation still is,” said Rissmiller. “Pausing a while longer would buy additional time to see the effects of recent shocks.”

To Ellen Zentner at Morgan Stanley Wealth Management, solid economic footing will allow the Fed to remain patient and away greater clarity before cutting interest rates.

“Markets will need to be patient as we await incoming data that will reveal the extent to which tariffs will drive higher inflation and slower growth,” she said.

Corporate Highlights:

• The top US bank regulators plan to reduce a key capital buffer by up to 1.5 percentage points for the biggest lenders after concerns that it constrained their trading in the Treasuries market.
• The Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency are focusing on what’s known as the enhanced supplementary leverage ratio, according to people briefed on the discussions. This rule applies to the largest US banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley.

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 0.1%
• The MSCI World Index fell 0.1%
• Bloomberg Magnificent 7 Total Return Index was little changed
• The Russell 2000 Index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.1477
• The British pound fell 0.1% to $1.3413
• The Japanese yen was little changed at 145.15 per dollar

Cryptocurrencies

• Bitcoin fell 0.4% to $103,952.39
• Ether fell 0.6% to $2,497.55

Bonds

• The yield on 10-year Treasuries was little changed at 4.39%
• Germany’s 10-year yield declined four basis points to 2.50%
• Britain’s 10-year yield declined six basis points to 4.49%

Commodities

• West Texas Intermediate crude was little changed
• Spot gold fell 0.6% to $3,367.61 an ounce

 

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