By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Post-Fed rally fades, global caution mounts
U.S. markets struggled for clear direction on Thursday, as investors cooled a few of their optimism around Federal Reserve Chair Jerome Powell’s view that the economy is in fine condition and tariff-related price rises can be transitory.
Wall Street’s bullish momentum from yesterday fizzled out and Treasuries and the dollar rose, indicating a broader ‘risk-off’ tone at play. Gold, which has already rocketed 16% this yr to latest highs, held its ground too.
It stays to be seen whether Powell’s confidence can be justified. The signs are ominous, as I’ll explain below. Warnings from all over the world in regards to the uncertain outlook have proliferated this week, from the Bank of Japan on Wednesday to the Bank of England, Swiss National Bank, Sweden’s Riksbank and European Central Bank President Christine Lagarde on Thursday.
Today’s Key Market Moves.
* Wall Street closes on a weak footing, with the Dowending flat, the S&P 500 down 0.2% and the Nasdaq off 0.3%. * European stocks post steeper losses, as defense stocksslide 2% and Germany’s DAX sheds 1.5%. * The Recent Zealand dollar sinks 1%, the most important move in G10FX, despite the country exiting recession. It is the second worstperforming G10 currency against the beleaguered greenback allyear, only behind the Canadian dollar. * The UK’s 2-year gilt yield spikes 8 basis points,flattening the curve, after the Bank of England’s ‘hawkishhold’. * Gold ends flat, so obviously not a ‘move’. Nevertheless it’snotable that after rallying 16% this yr – heading in the right direction for itsbest quarter in 40 years – it remains to be hugging its record highabove $3,000/oz. * Turkey’s central bank hikes its overnight lending rateto 46% from 42.5% to counter the lira’s plunge to a record low42 per dollar on Wednesday. The lira closes at 38.00 per dollaron Thursday, little modified on the day.
So, the day after the afternoon before, and markets took a more tempered view on the Fed’s latest economic projections and Powell’s press conference. As BNP Paribas’s Guneet Dhingra wryly noted, given the extent of economic uncertainty, perhaps the post-Fed response itself was all the time more likely to be ‘transitory’.
And so it seems. Powell is already coming in for some flak, although not from a wholly unexpected source. “The Fed can be MUCH higher off CUTTING RATES as U.S. Tariffs begin to transition (ease!) their way into the economy. Do the appropriate thing,” President Donald Trump posted on his Truth Social platform late on Wednesday.
Investors are actually beginning to turn their attention to April 2, when Trump’s proposed reciprocal tariffs take effect. In the event that they kick in as planned, other countries will likely take counter measures and a ‘tit for tat’ spiral could speed up. That may be bad news for world growth, inflation, and markets.
Deutsche Bank economists on Thursday said that the rise in trade policy uncertainty could shave 0.75 percentage points from U.S. GDP through mid-2026. But that assumes uncertainty quickly returns to ‘normal’. If it stays at current levels through June, the hit to growth may very well be double that.
And because the old adage goes, if the U.S. catches a chilly – especially one which severe – the remainder of the world can be sneezing.
Investors draw transitory vs stagflation battle lines
The fate of U.S. financial markets this yr will largely rely upon whether any tariff-fueled inflation seems to be “transitory”, enabling the Federal Reserve to chop rates of interest, or whether the central bank gets bogged down by the specter of “stagflation”.
The primary scenario is the one Chair Jerome Powell outlined on Wednesday because the central bank’s “base case”, sparking a strong rally on Wall Street and a pointy drop in Treasury bond yields. So it’s risk on, right?
Investors selected to disregard the second scenario, regardless that it’s arguably the more obvious one to attract from the Fed’s revised economic projections.
Policymakers are actually expecting higher inflation and meaningfully slower growth. The median rate of interest ‘dot plot’ was unchanged from December, still pointing to 2 cuts this yr, but there is a shift underway – eight policymakers now think one cut or none in any respect can be appropriate this yr. So, risk off?
‘Team transitory’ could have stolen a march on ‘team stagflation’, but plenty of stars might want to align for it to emerge victorious over the long haul.
THE T-WORD
Many investors likely shuddered when Powell invoked the T-word on Wednesday, given the Fed has had to maintain rates higher for longer precisely since the post-pandemic inflation surge wasn’t as transitory as Powell and then-Treasury Secretary Janet Yellen had claimed.
That said, Powell is correct that the inflation brought on by President Donald Trump’s 1.0 trade war was transitory. Academic studies suggest the first-round impact of Trump’s 2018 tariffs added as much as 0.3 percentage points to core PCE inflation, but annual core PCE inflation in 2018 never exceeded 2% and fell in 2019.
Still, the Fed’s credibility took a beating with the post-pandemic ‘transitory’ debacle, so Powell could also be leaving himself and the institution open to further attacks if any future price increases prove to be stickier than bargained for.
This can be a real risk because Trump’s proposed tariffs are of a complete different order this time around. A Boston Fed paper last month estimated that the first-round impact of tariffs could add between 1.4 and a pair of.2 percentage points to core PCE.
This might have a much deeper and longer-lasting impact on inflation. Fed officials are wary. Not only did they raise their median 2025 inflation outlook, but some also raised their 2026 and 2027 projections, and 18 out of 19 imagine price risks are still skewed to the upside.
STAGFLATION SPECTER
It is also value noting that Fed officials lowered their growth projections significantly greater than they raised their inflation outlook.
The 2025 growth outlook fell to 1.7% from 2.1%, and all the way down to 1.8% for the subsequent two years. Granted, that is still decent growth and nowhere near a recession, nevertheless it would mark the primary back-to-back years of sub-2% expansion since 2011-12.
Furthermore, 18 out of 19 Fed officials see growth risks still tilted to the downside, compared with only five in December. Even when the Fed does cut rates, it’s just as more likely to be in response to the economy rolling over and unemployment stoning up than anything. Would that be ‘risk on’?
While nobody is talking a few return to the Seventies, stagflation risks are rising, which hugely complicates the Fed’s response function. The bar for cutting rates is getting higher, and it’s difficult to see how this creates a positive environment for risk-taking – that’s, unless team transitory emerges victorious ultimately.
What could move markets tomorrow?
* Japan consumer price inflation (February) * South Korea producer price inflation (February) * Malaysia consumer price inflation (February) * Recent Zealand trade (February) * Thailand trade (February) * UK public funds (February) * Euro zone current account (January) * Euro zone consumer confidence (March, flash estimate) * Chicago Fed President Austan Goolsbee speaks * Recent York Fed President John Williams speaks * Canada retail sales (February)
If you will have more time to read today, listed below are just a few articles I like to recommend to show you how to make sense of what happened in markets today.
1. Fed’s balancing act gives respite to tariff-struckinvestors 2. Trump trade upheaval leaves foreign central banksguessing 3. Wall Street jolt may jog jobless rate: Mike Dolan 4. Traders trim UK rate cut bets as Bank of England fliesblind on tariffs 5. Turkey’s market turnaround stumbles as Erdogan rivaldetained
I’d love to listen to from you, so please reach out to me with comments at . You may as well follow me at [@ReutersJamie and @reutersjamie.bsky.social.]
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(By Jamie McGeever, editing by Diane Craft)