The Fed’s inflation warning caught markets off guard
The U.S. Federal Reserve (the Fed) left rates unchanged at 4.25-4.5% for the fourth consecutive meeting, with Fed policymakers still expecting two rate cuts later in 2025. However, the market’s attention quickly shifted to Fed Chair Powell’s press conference. His key comment, “We expect a meaningful amount of inflation in coming months,” caught traders off guard, especially as he acknowledged signs that companies plan to pass on higher costs from tariffs. Powell emphasized uncertainty about the size, scope and duration of tariff impacts. The result was a volatile trading session that saw stocks swing on Powell’s tone and a barrage of President Trump headlines about Iran. Equities finished flat, yields held steady and traders were left with more questions than answers.
Beyond the press conference’s usual drama, the Fed’s updated projections hinted at a more stagflationary backdrop: GDP forecasts for 2025 were revised down to 1.4% from 1.7%, while inflation was revised up to 3.1% from 2.8%. Despite that, the median forecast for 2025 still calls for two rate cuts, with fewer reductions expected in 2026 and 2027. Fed Chair Powell acknowledged labour markets remain solid, but also noted a “very, very slow cooling.” The Fed appears in no rush, preferring to “wait and learn more” before adjusting policy, especially with tariff effects still uncertain, and fiscal developments evolving.
Global markets turned away from risk after Trump was reported as saying that he will decide within the next two weeks whether the U.S. will be directly involved in striking Iran. Oil surged on supply concerns. Any U.S. action could trigger a knee-jerk market reaction, with safe-haven demand for Treasuries and gold likely to rise. However, we suggest you listen to this week's podcast to know more about investing in times of geopolitical turbulence. Investors are now weighing the inflationary risk of higher oil prices against a Fed still trying to assess the real economic toll of tariffs. As geopolitical tensions mount, risk appetite is fading.
While U.S. markets were closed on Thursday of this week, they weren’t quiet on Friday, which saw the largest June options expiry on record (options are contracts to buy or sell an asset at an agreed price, at a later date). Plus, with Middle East risk likely to remain front and centre for some time, the Fed may be standing still, but the world isn’t.
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