Stock Markets Sink as the Fed Puts Rate Cuts Out of Reach
Stock Markets Sink as the Fed Puts Rate Cuts Out of Reach
By:Ilya Spivak
Can risk appetite survive across global markets if central banks restart the fight against inflation?
- Inflation fears spook the markets after scorching US PPI report
- The Fed settles into wait-and-see mode, seems to push back cuts
- ECB and BOE policy updates may bring signs of a hawkish pivot
Stock markets were already under pressure when the Federal Reserve delivered its March 18 monetary policy announcement. In what is now a familiar display, worries about runway inflation animated the selloff. The US central bank then poured more gasoline on the fire, triggering panic across financial markets.
The initial push lower came as US producer price index (PPI) data revealed a sharp jump in wholesale inflation. The headline rate unexpectedly jumped to 3.4% year-on-year, sailing past forecasts eyeing 2.9%. Core PPI, which excludes food and energy prices, jumped to 3.9% year-on-year. Those are the fastest readings in a year.
Inflation fears spook markets after blistering US PPI data
The data landed as a gut punch for risk appetite, aggravating already sore investors that have done little else this month but worry about how runaway inflation will force central banks – the Fed chief among them – to cancel rate cuts. That is as the US-Iran war drives a sharp surge in crude oil prices.
Stocks fell alongside bonds as Treasury yields pushed higher alongside the US dollar. Gold prices fell too even as hostilities in the Middle East showed no signs of letting up, seemingly unable to withstand the pressure exerted by higher rates and resurgent demand for the ultimate liquidity of the greenback, its fiat nemesis.
Against this backdrop, the Fed issued a deceptively neutral policy statement. Its brevity would turn out to foreshadow officials’ bewilderment. Speaking at the press conference following the conclave, Fed Chair Jerome Powell sounded much as he did a year ago speaking about tariffs: it is unclear whether this oil shock will untether inflation, but it might.
Perhaps most critically, Powell explained that the Fed must see progress on goods inflation – where the impact of last year’s tariffs is washing out slower than expected – before it even considers whether the oil spike ought to impact policy. “If we don't see [progress], then you won't see the rate cut,” he said bluntly.
Will markets break as central banks retreat from rate cuts?
That stoked the risk-off flame across financial markets. The bellwether S&P 500 stock index finished the day down 1.42%. The 10-year Treasury bond fell 0.4%, erasing gains from the prior two days. Gold fell 3.75%, its biggest loss in two weeks. The US dollar added 0.73% against an average of major currencies.
The European Central Bank (ECB) and the Bank of England (BOE) will now have their say. The priced-in outlook for both central banks has sharply swung to hawkish setting thanks to oil’s buoyancy. The 2026 ECB outlook has added a 25-basis-point (bps) rate hike in just two weeks. The BOE is now favored to hike having been marked to cut rates twice.
No changes are expected this time from either central bank, but markets will look for comments confirming alarm at rising inflation risks as well as commitment to fight back as needed. The Bank of Japan (BOJ) left its policy rate unchanged as expected but warned that escalating Middle East tensions cloud the outlook.
The markets are buffeted by uncertainty from all sides. Has AI euphoria overextended? Is there a credit crisis lurking behind the ominous rumbling in private credit markets? How long will the Strait of Hormuz remain functionally closed? If traders must be made to bear it all without the anesthetic of cheap credit, a rush to cash may follow.
Ilya Spivak, tastylive head of global macro, has over 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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