Stock, Bonds and the U.S. Dollar in the Balance: FOMC Meeting Preview

Fearful financial markets are hoping to feel seen by the Federal Reserve.

• Stocks are falling as data shows policy uncertainty is already hurting growth.
• Traders are hoping that dovish signaling from the FOMC will revive sentiment.
• Bonds may rise while yields and the U.S. dollar fall amid rate cut speculation.

Even before the election in November, financial markets were well aware that Donald Trump and his team favored using tariffs to reshape the country’s economic relationships with friends and foes alike. They knew that these tariffs were almost certainly coming after the votes were counted and took the news in stride.

Traders even dismissed the President’s first flip-flop on tariff policy in February, when the first round of levies on Canada and Mexico were paused within 24 hours of being activated following bilateral talks between Mr. Trump and the two country’s leaders. Markets swooned as the tariffs turned on, then promptly rebounded as they were turned off.

The markets’ assessment has only darkened as it became obvious that economic growth is being hurt by ongoing trade policy reversals and a broader sense of instability in fiscal matters. Scrambling to rehire some haphazardly fired federal workers or issuing a flurry of wavers for cancelled foreign aid recipients make for inconvenient optics.

Stocks scramble as uncertainty starts to hurt the U.S. economy

In February, all of this began to appear in stark relief in closely watched business and consumer confidence surveys. S&P Global purchasing managers index (PMI) figures point to a dizzying drop in service sector activity growth so far this year. University of Michigan data puts consumer sentiment at the weakest since July 2022.

Stock markets have tumbled. The bellwether S&P 500 index recorded its first four-week losing streak since August and the steepest such drop since October 2022. For their part, administration officials including Treasury Secretary Scott Bessent dismissed the selloff as a necessary “adjustment” and hailed the economy as “healthy”.

Bond markets have rallied, pushing down Treasury yields. That has eroded the interest rate advantage of the U.S. dollar, sending it sharply lower. Traders have seemingly reasoned that if the White House refuses to hear market signaling and change course, it will fall on the Federal Reserve to come to the rescue with more generous rate cuts.

All eyes on the Fed: when will the cheaper money come?

This puts the incoming policy announcement from the U.S. central bank’s rate-setting Federal Open Market Committee (FOMC) firmly into the spotlight. Benchmark Fed Funds interest rate futures have moved from pricing in about 50 basis points (bps) in rate cuts through the end of 2026 a month ago, to nearly double that at 83bps now.

No changes to the target rate range are expected at this meeting, but the quarterly update of the FOMC’s Summary of Economic Projections (SEP) will be closely scrutinized in hopes of a dovish signal. Traders are likely to be disappointed if officials opt for a “wait-and-see” approach instead, as Fed Chair Jerome Powell signaled in a recent speech.

Bonds may continue to march higher as Treasury yields and the U.S. dollar fall if recession fears build against this backdrop. That would reflect traders expecting that a delay now will amount to faster and sharper rate cuts downwind as the Fed catches up to incoming economic weakness. If such hope for cheaper money lifts stocks remains to be seen.

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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