One major catalyst of the week can make a comeback or break as the market tries to recover from recent sales measures that left the S&P 500 (^GSPC) and NASDAQ (^Ixic) in the corrections domain. Wednesday’s Federal Reserve policy decision.
The central bank is expected to stabilize interest rates in the face of tariff uncertainty and recent growth concerns.
However, the simultaneous release of the Fed’s quarterly forecasts is called the Economic Forecast Overview (SEP) and is at the heart of investors’ unpacking, along with Fed Chairman Jerome Powell’s post-mortem press conference.
“Powell Post Form must reassure the market’s growth. Healthy and the inflation trajectory still shows 2%, as confidence shaking amidst the fear of stagflation, or confidence shaking amid the fear of a complete recession.”
Read more: How Fed Rate Decisions will affect your bank account, loans, credit cards and investments
A bleak economic scenario with growth stalling, inflation continuing and unemployment rising has become the latest trend in financial markets as investors try to understand the administration’s changing trade narrative and other policy unknowns, including Elon Musk’s recent efforts to cut government jobs from government efficiency (DOGE).
In a global survey of 171 participants, Bank of America’s latest Global Fund Manager Survey released Tuesday, 71% of investors surveyed expect STAGFLATION, the highest level since November 2023.
Federal Reserve Chair Jerome Powell will speak at the annual US Monetary Policy Forum in New York City on March 7th (AP Photo/Richard Drew, File) ・Associated Press
Amidst the fear of stagflation, recent research and emotional indicators (often called “soft” economic data) have been at the heart of concern, marking the revival of “bad news about the economy is bad news for stocks.”
Powell recently argued that emotion measures have “been not a good predictor of consumption growth in recent years.” He also consistently highlights an on-the-scene approach to assessing the economic impact of policy changes.
But that doesn’t stop Wall Street from becoming more cautious. Over the past few weeks, many companies, including JPMorgan (JPM), Goldman Sachs (GS), and Morgan Stanley (MS), have reduced their respective growth targets and referenced the expected effects of restrictive trade and immigration policies.
This was followed by a downward revision of the year-end S&P 500 targets by research from RBC Capital Markets, Goldman Sachs and Yaldeni.
The story continues
“In regards to growth (the “stud” part of Stag), Powell needs to reaffirm his recent clear certainty that despite the weak “soft” data, “hard” data remains collaborative,” writes Emmanuel.
On Monday, February retail sales were considered “hard” data points by economists and rose more than expected, but January reading was revised lower as Americans pulled back discretionary spending.
However, there were some encouraging signs in the report details, such as a massive rebound of Control Group sales, which is directly supplied to GDP.
Meanwhile, “on the ‘flation’ portion of stagflation,” wrote Emmanuel, “Powell should show 2% that inflation remains in that path, even within the potential short-term hurdles.”
Inflation for both consumers and producers showed that price increases slowed during February. However, subsurface details show potential impasses when reaching the 2% target of the Fed.
“FOMC participants had to rethink their forecasts as the initial tariffs were enforced and the White House was ultimately set to impose larger tariffs,” Goldman Sachs economist Jan Hatzius wrote in a note on Sunday.
In December, the Fed predicted interest rates would fall to 3.9% this year, and proposed two 25 baseline cuts. Authorities also saw the core PCE inflation slow to 2.5% and unemployment rates rose slightly to 4.3%. The economy was previously forecast to grow at a rate of 2.1% per year.
Goldman Sachs expects a median revision of the Fed’s 2025 economic forecast of 0.3 percentage points upwards to a core PCE inflation rate of 2.8%, and a 0.3 percentage points GDP growth rate of 1.8%.
Goldman Sachs’ own forecasts show a sharp estimate of inflation and a more substantial DIP for economic growth. This is to project a 3% core PCE and a 1.6% GDP growth.
JP Morgan’s chief US economist Michael Ferroli agreed, saying that while expectations for declines in growth and inflation are high, “We present a confusion for the Fed, but we expect the median participants to look for two cuts this year as well.” The market is currently priced with three cuts, according to Bloomberg data.
On Wednesday, Ferroli hopes Powell will remain consistent with little by little strong views on trade, immigration and fiscal policy, adding, “I think the Fed is saying there’s no need to hurry, despite the market prices for May cuts rising recently.”
Alexandra Canal is a senior reporter on Yahoo Finance. X @Allie_Canal, follow her on LinkedIn and email her to alexandra.canal@yahoofinance.com.
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