As markets strive to bounce back from the recent downturn that has pushed both the S&P 500 (^GSPC) and Nasdaq (^IXIC) into correction territory, all eyes are on a key event this week that could determine the direction of the recovery: Wednesday’s decision by the Federal Reserve on interest rates.
The expectation is that the Fed will leave interest rates unchanged, especially given the ongoing uncertainties surrounding tariffs and recent concerns about economic growth.
However, investors will be keenly analyzing the details of the Fed’s quarterly forecasts, known as the Summary of Economic Projections (SEP), as well as Federal Reserve Chair Jerome Powell’s remarks during his post-decision press conference.
“After the FOMC meeting, Powell will have to allay market concerns by reassuring investors that economic growth remains robust and that inflation is still on track to reach the 2% target, as confidence is shaky due to worries about stagflation or even a potential recession,” noted Julian Emanuel from Evercore ISI in a client briefing on Sunday.
Stagflation—a scenario with stagnant growth, persistent inflation, and rising unemployment—has caught investors’ attention lately. This concern grows as they try to make sense of the current administration’s changing trade policies and other uncertainties, such as recent initiatives to reduce public sector jobs by Elon Musk’s Department of Government Efficiency (DOGE).
Bank of America’s most recent Global Fund Manager Survey, released Tuesday, indicated that 71% of the 171 investors surveyed now anticipate stagflation, marking the highest level of such expectations since November 2023.
“When discussing growth, which is the ‘stag’ part of stagflation, Powell will need to emphasize that the solid ‘hard’ data continues to be encouraging, despite weaker ‘soft’ data,” said Emanuel.
“As for the ‘flation’ part of stagflation, he must assure that inflation is progressing towards the 2% target, even if there are short-term challenges,” Emanuel added.
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