Less than two weeks ago, Federal Reserve Chairman Jerome Powell characterized the economy as strong, the labor market as "solid," and said makers of monetary policy were "well positioned to wait for greater clarity" before the next interest-rate move. That take hasn't aged very well. And it probably won't win over the S&P 500 if Powell repeats it during today's post-Fed meeting press conference.
Wall Street will comb the Federal Reserve's policy statement, due at 2 p.m. ET, for any subtle changes in the Fed's assessment of the economy. Expectations also call for a stop to the Fed's shrinking balance sheet, at least temporarily. New quarterly projections, also out at 2 p.m., could tweak the expected trajectory for the Fed's key rate and inflation. However, markets will likely take their signal from Powell's 2:30 p.m. news conference.
Trump Agenda Impact On Fed Policy
In a March 7 speech at the University of Chicago, Powell noted that the Trump administration is preparing to implement "significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation." Powell added, "It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy."
Yet Powell's assertion that the Fed can wait for policy clarity before acting may be tested. Tariffs and DOGE spending cuts and layoffs are beginning to mount. A big escalation could possibly arrive on April 2, when the Trump administration unveils reciprocal tariffs tailored to level the playing field against each U.S. trading partner.
Yet Trump's tax cuts may take several more months to come to fruition. Republicans in the House and Senate are still getting on the same page, and at least a couple of GOP senators have said budget reconciliation could drag on until August or September because tax policy is so complicated.
A further uncertainty is how deep budget cuts will go, considering that Medicaid cuts could face some internal opposition. That means it may take until late in the process to know how much of a fiscal punch the tax package will actually pack.
For the Fed, the upshot is that policy clarity may be a long time in coming. If the job market slows further, Wall Street will want to hear that Powell won't hesitate to cut rates, even though tax cuts are on the way and core inflation ticked higher in February.
QT Update
Minutes from the Jan. 28-29 Fed meeting indicated that a halt to borrowing until the debt ceiling is raised again argues for a stoppage of the Fed's balance-sheet runoff. Currently, the Fed is letting up to $25 billion per month in Treasurys and up to $35 billion per month in mortgage securities run off its balance sheet as they mature.
That process continues to reverse pandemic-era asset purchases that expanded the Fed's balance sheet. For now, Treasury is funding government by depleting its cash reserve in lieu of further borrowing. A pause in Fed asset runoff, also known as quantitative tightening, will allow Treasury's cash to last for longer.
Federal Reserve Rate-Cut Odds
As of Wednesday morning, markets see just a 1% chance of a rate cut at today's Fed meeting, according to CME Group's FedWatch tool.
Odds of a rate cut at the May 7 Federal Reserve's meeting stand at just 16%, down from 48% on March 10. The change stems from last week's consumer price index and producer price index reports. While the figures in both reports showed tamer-than-expected inflation, the specific components that feed into the Fed's primary inflation rate, the core PCE price index, point to a rise in core inflation to 2.8% from 2.6%.
Markets now see 60% odds of a rate cut by the June 18 Fed meeting, which could come a few months before the Trump tax bill. For the full year, markets are leaning toward 50 basis points in rate cuts, with 41% odds of 75 basis points in cuts.
The most recent quarterly projections from the Federal Reserve's issued in December showed 50 basis points in rate cuts this year.
S&P 500
The S&P 500 rose 0.3% in Wednesday morning stock market action, following Tuesday's 1.1% decline. As of Tuesday's close, the S&P 500 stood 8.6% below its record closing high on Feb. 19.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
