As the Federal Reserve’s two-day meeting begins, investors have accepted that the central bank probably won’t be cutting interest rates this time. But with the stock market at a tenuous point, what they’re looking for is any signal from Chairman Jerome Powell on which way inflation is going.
“Powell’s tone on inflation is crucial for Wall Street because traders need to hear that price pressures are continuing to ease,” said John Belton, a portfolio manager at Gabelli Funds. “There are clearly potential black swans out there.”
The S&P 500 Index posted its worst session in 10 days on Monday, after buzz around Chinese artificial intelligence startup DeepSeek raised questions about US dominance in artificial intelligence and the rich valuations of Big Tech behemoths like Nvidia Corp. At the same time, the central bank is wrestling with the start of President Donald Trump’s new administration, which came with a flurry of executive orders and the beginning of his promised immigration crackdown, while the threat of sweeping tariffs on US trade partners lingers in the background.
“The unwinding of the AI trade is something to watch,” said Jeff Buchbinder, chief equity strategist at LPL Financial. “Tariffs are a wild card.”
By some measures, this Fed meeting is expected to be relatively uneventful for the stock market. Options traders are betting on modest swings in equities, with the S&P 500 forecast to move 0.8% in either direction on Wednesday, below the 1.1% average realized move on Fed days over the past 18 months, data compiled by Piper Sandler show.
Swaps show traders expect a pause in interest-rate cuts, but they aren’t sure how long it will last. That’s where Powell’s tone at his press conference after the rates decision on Wednesday afternoon comes in. It would be out of character for him to be anything other than cautious and non-committal, but Wall Street pros will be listening for anything in his wording or tone that indicates his thinking.
“We’ll be focused on how Powell threads the needle between acknowledging more supportive economic data and ongoing policy uncertainty,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. His firm is positioning for a market rotation outside of tech with slight overweights to staples, energy and industrials.
Traders are starting to wonder if the implied moves when Powell speaks will be higher after the Cboe Volatility Index briefly spiked above 20 on Monday, a level that typically signals stress in the stock market.
Wall Street’s chief fear gauge closed at 17.90 on Monday, the highest level since the Fed’s previous meeting ended on Dec. 18. Back then, Powell warned that the officials would need to keep monetary policy restrictive to battle inflation. The S&P 500 plunged roughly 3% as a result, marking its biggest top-to-bottom intraday reversal in two years.
“We see the Fed on pause for a while,” said Matt Lloyd, chief investment strategist at Advisors Asset Management. In response, his firm favors financials, industrials, real estate and select health care and utilities companies that are closely tied to a strong economy.
The stock market is already experiencing increased turbulence around economic releases and events. Over the past three months, the S&P 500’s average realized volatility has been 22% on days when there’s either a Fed rate decision, a report on consumer prices, or the government gives its monthly jobs data — double the 11% reading for all other sessions, data complied by Asym 500 show.
Still, some Wall Street professionals aren’t expecting much clarity from the Fed chief.
“We’re not making any big bets on Fed policy changes,” said Gabelli’s Belton, whose firm is optimistic on US stocks tied to AI growth. “It’s highly unlikely we’re going to get any pre-commitment from Powell on the timing of future cuts.”
The other positioning challenge is the number of additional catalysts surrounding the Fed decision and Powell’s press conference. In particular, some key US corporations are due to report their earnings, with Microsoft Corp., Meta Platforms Inc. and Tesla Inc. on Wednesday, followed by Apple Inc. the next day.
The bottom line is so much is unknown, from the Fed’s rate path, to earnings growth, to how White House policy is implemented and affects Corporate America, according to Sevasti Balafas, chief executive officer of GoalVest Advisory. That leaves investors with one familiar strategy.
“Don’t fight the Fed,” Balafas said. “If inflation stays elevated and rates remain high, that will negatively impact stocks, though if companies making heavy investments in AI continue to see a positive impact to their bottom lines, then the market will continue to run.”
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