As markets attempt to recover from recent sell-off action that’s left the S&P 500 (^GSPC) and Nasdaq (^IXIC) in correction territory, one major catalyst this week could make or break a comeback: Wednesday’s Federal Reserve policy decision.
The central bank is expected to hold interest rates steady in the face of tariff uncertainties and recent growth concerns.
But the simultaneous release of the Fed’s quarterly forecasts, otherwise known as the Summary of Economic Projections (SEP), along with Fed Chair Jerome Powell’s post-decision press conference, will be at the center of investor unpacking.
“Powell post-FOMC will have to reassure markets growth remains healthy and inflation’s trajectory still points to 2% as confidence is wavering amid stagflation worries, or outright recession fears,” Evercore ISI’s Julian Emanuel wrote in a note to clients on Sunday.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
A bleak economic scenario in which growth stalls, inflation persists, and unemployment rises, stagflation has become the latest buzzword in financial markets as investors attempt to understand the administration’s shifting trade narrative and other policy unknowns, including recent efforts to cut government jobs from Elon Musk’s Department of Government Efficiency (DOGE).
In a global survey of 171 participants, Bank of America’s latest Global Fund Manager Survey, released Tuesday, showed 71% of surveyed investors expect stagflation, the highest level since November 2023.
Federal Reserve Chair Jerome Powell speaks during the annual US Monetary Policy Forum in New York City on March 7. (AP Photo/Richard Drew, File) ·ASSOCIATED PRESS
Amid stagflation fears, recent surveys and sentiment indicators — often referred to as “soft” economic data — have been at the center of concerns, marking the return of “bad news for the economy is bad news for stocks.”
Powell recently argued that sentiment readings “have not been a good predictor of consumption growth in recent years.” He has also consistently stressed a wait-and-see approach to assessing the economic impact of policy changes.
But that hasn’t stopped Wall Street from turning more cautious. In recent weeks, a number of firms — including JPMorgan (JPM), Goldman Sachs (GS), and Morgan Stanley (MS) — have reduced their respective growth targets, referencing the anticipated effects of restrictive trade and immigration policies.
That’s been followed by a handful of downward revisions for year-end S&P 500 targets, with RBC Capital Markets, Goldman Sachs, and Yardeni Research all lowering their respective calls over the past week.
Story Continues
“With regards to growth (the ‘stag’ part of stagflation), Powell will need to reconfirm his recently articulated certainty that the ‘hard’ data remains supportive, even as the ‘soft’ data is weak,” Emanuel wrote.
On Monday, February’s retail sales, considered a “hard” data point by economists, rose less than expected, while January’s reading was revised lower as Americans pull back on discretionary spending.
But there were some encouraging signs within the details of the report, such as the large rebound in control group sales, which feeds directly into GDP.
Meanwhile, “on the ‘flation’ part of stagflation,” Emanuel wrote, “Powell must indicate inflation remains on its path to 2%, even amidst potential near-term hurdles.”
Both consumer and producer inflation showed a deceleration in price growth over the month of February. But details under the surface pointed to a potential stalling out in reaching the Fed’s 2% target.
“FOMC participants will have to rethink their projections now that the first tariffs have taken effect and the White House looks set to eventually impose larger tariffs than initially seemed likely,” Goldman Sachs economist Jan Hatzius wrote in a Sunday note.
In December, the Fed projected interest rates to fall to 3.9% this year, suggesting two 25-basis-point cuts to come. Officials also saw core PCE inflation slowing to 2.5%, with the unemployment rate ticking up slightly to 4.3%. The economy was previously projected to grow at an annualized pace of 2.1%.
Goldman Sachs expects the Fed’s 2025 median economic projections to show a 0.3 percentage point upward revision to core PCE inflation to 2.8% and a 0.3 percentage point downgrade to GDP growth to 1.8%, “mainly reflecting the tariff news.”
Goldman Sachs’ own forecasts see a steeper estimate for inflation and a more substantial dip for economic growth — projecting core PCE of 3% and GDP growth of 1.6% — “but FOMC participants are likely to adjust a bit more cautiously until tariff policy becomes clearer.”
JPMorgan chief US economist Michael Feroli agreed, noting that lower growth and higher inflation expectations “present a quandary for the Fed, though we expect the median participant will still look for two cuts this year.” Markets are currently pricing in three cuts, according to Bloomberg data.
On Wednesday, Feroli expects Powell to stay consistent in mostly avoiding strong views on trade, immigration, and fiscal policies, adding, “While market pricing for a May cut has been moving up lately, we think he will continue to say that the Fed doesn’t need to be in a hurry.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
Click here for the latest economic news and indicators to help inform your investing decisions
Read the latest financial and business news from Yahoo Finance
