FOMC Preview: Stocks at Risk but Bonds May Rise as the Fed Dithers

The central bank will probably hold off on an interest rate cut

• The markets want more urgency from the Fed on interest rate cuts.
• Fed Chair Powell and company probably remain in “wait-and-see” mode.
• Stocks are at risk but bonds may rise as stimulus gets pushed back.

Stock markets are in a defensive mood as all eyes turn a much-anticipated monetary policy announcement from the Federal Reserve. The bellwether S&P 500 stock index seems to encapsulate the mood. It has retraced about 2% lower from a one-month high last week, which capped a blistering nine-day winning streak.

The pullback seems to reflect a kind of defensive rebalancing before critical event risk. The U.S. central bank is overwhelmingly expected to keep its interest target unchanged this time around, putting the spotlight on the interpretive parts of the policy update: officials’ post-meeting statement and a press conference with Chair Jerome Powell.

The Fed is resisting market calls for rate cut urgency

As it stands, the markets are pricing in 100 basis points (bps) in cuts through the end of next year, which neatly lines up with the forecast issued by Fed officials in December and reiterated in March. Traders are pining for greater urgency, however, calling for 75bps this year and 25bps in 2026. Policymakers envision an even 50bps split.

Since March, Powell and company have acknowledged signs of economic stress screaming from business and consumer confidence surveys amid the roughshod rollout of the Trump’s administration’s trade agenda. They’ve resisted leaning against the weakness with rate cuts, worrying aloud about unleashing runaway inflation expectations.

The “hard data” that Fed officials have wanted to clearly beckon stimulus has yet to materialize. First-quarter gross domestic product (GDP) growth disappointed, but tariff-induced anomalies in the numbers cloud the way forward. Jobs growth narrowly outperformed in April, but the result from March was revised lower in almost equal measure.

Political pressure muddies the waters as inflation cools

On the inflation front, the Fed’s favored personal consumption expenditure (PCE) gauge showed core price growth excluding volatile food and energy prices slowed to 2.6% year-on-year in March. That’s the lowest since June last year. Moreover, three- and six-month annualized growth trends are cooling after spiking in February.

The markets seem to be giving the Fed permission to focus on backstopping economic growth. Inflation expectations priced into the bond market—so-called “breakeven rates”—have trended firmly lower since mid-February. They seem to suggest that any price increases from tariffs will be more than offset by the fall in demand that they then trigger.

That’s probably not enough by itself to spur onm a defensively minded Fed keen to avoid the appearance of kowtowing to a belligerent White House.

Policymakers are acutely aware that they are only effective if the markets continue to view the central bank as credibly independent. President Trump has walked back threats to fire Powell, for now.

Stocks at risk but bonds may rise on “more cuts later” Fed view

With all of this in mind, the rate-setting Federal Open Market Committee (FOMC) will probably opt to remain in “wait-and-see” mode, keeping its guidance vague enough for ample flexibility in the months ahead. That seems unlikely to be satisfying for stock markets, which may retrace some more of the sprint higher from April’s lows.

The bond market may prove to be jumpier, however. If traders conclude that the Fed is unduly dragging its feet, they are likely to position for more potent easing downwind as the central bank races to catch up. That may apply outsized pressure to longer-dated Treasury yields, sending the corresponding prices higher. And the U.S. dollar might weaken.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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