FOMC Preview: Will Stock Markets Be Punished as the Fed Stalls?

Stocks may be punished as the markets react with disappointment to a listless Federal Reserve

• The Fed is broadly seen holding policy steady at this week’s FOMC meeting.
• Updated growth, inflation and interest rate forecasts may bring little clarity.
• Disappointed markets might punish stocks and the US dollar as bonds rise.

Economists and traders agree: the Federal Reserve will keep its interest rate target unchanged when the steering Federal Open Market Committee (FOMC) delivers the verdict of this week’s policy conclave. Benchmark Fed Funds futures imply the priced-in probability of that outcome at a commanding 99.9%.

That might make it tempting to write off the Fed’s announcement as market-moving event risk. The central bank has argued since March that the flurry of tariffs rushed out by the Trump administration complicate its calculus. Officials suspect the policy may hurt economic growth while lifting inflation but see the outlook as highly uncertain.

With that in mind, they’ve opted for a tactical pause until either the “price stability” or the “maximum employment” side of their dual mandate rings an unmistakable alarm bell. The latest batch of economic data seems to suggest little has changed: the jobless rate is modest at 4.2% and inflation is seemingly benign, at least for now.

Will the Fed finally do something on monetary policy? Probably not.

This suggests that policymakers have little impetus to change their tune, especially as reciprocal tariff deadlines loom in early July and August. The White House put levies above 10% on hold for 90 days in early April to make time for negotiations. The pause expires for most countries on July 9, and for China on Aug. 12.

Indeed, the markets see the likelihood of a rate cut in July as relatively minimal at just 14.5%. The first of two 25-basis-point (bps) reductions is narrowly penciled in for September’s meeting, with the second to follow in December. However, the probability of its timely arrival before year-end is only a bit better than even at 56%.

Minutes from last month’s FOMC gathering showed officials thought uncertainty about the outlook had increased, and that the central bank staff’s economic growth estimates had weakened since March. They warned in the policy statement “the risks of higher unemployment and higher inflation have risen.”

The updated Summary of Economic Projections (SEP) to be delivered alongside this week’s policy decision will probably reflect as much, revising forecasts for gross domestic product (GDP) growth lower and those for inflation higher. The outcome ranges around median projections will probably widen too, reflecting a more clouded landscape.

Stocks are at risk if Fed dithering disappoints the markets

Meanwhile, forecasts for the path of interest rates may be left unchanged yet again. Since December, they’ve called for 50bps in cuts this year and a repeat performance in 2026. Fed Chair Jerome Powell will likely argue yet again that the FOMC is not ready to make up its mind and still has a friendly-enough economic backdrop to keep thinking.

The markets may run out of patience with this dithering, however. They seem to have made up their mind about which side of the mandate the Fed ought to be focused on. Inflation expectations priced into the bond market – so-called “breakeven rates” – have been falling for a month, signaling ebbing inflation risk and beckoning rate cuts.

This means that what traders want to see is some kind of nod in a more dovish direction, if only rhetorically. If that does not materialize, disappointed markets may move to price in a steeper rate cut cycle downwind as the central bank plays catch-up after a late start. That may hurt stocks and the US dollar while bonds and gold find support.

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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