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 some of their optimism around Federal Reserve Chair Jerome Powell’s view that the economy is in good shape and tariff-related price rises will be transitory.
Wall Street’s bullish momentum from the previous day fizzled out and Treasuries and the dollar rose, indicating a broader ‘risk-off’ tone at play. Gold, which has already rocketed 16% this year to new highs, held its ground too.
It remains to be seen whether Powell’s confidence will be justified. The signs are ominous, as I will explain below. Warnings from around the world about 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.
So, the day after the afternoon before, and markets took a more tempered view on the Fed’s new economic projections and Powell’s press conference. As BNP Paribas’s Guneet Dhingra wryly noted, given the level of economic uncertainty, perhaps the post-Fed reaction itself was always likely to be ‘transitory’.
And so it seems. Powell is already coming in for some flak, although not from an entirely unexpected source. “The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy. Do the right thing,” President Donald Trump posted on his Truth Social platform late on Wednesday.
Investors are now starting to turn their attention to April 2, when Trump’s proposed reciprocal tariffs take effect. If they kick in as planned, other countries will likely take counter measures and a ‘tit for tat’ spiral could accelerate. That would 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 remains at current levels through June, the hit to growth could be double that.
And as the old adage goes, if the U.S. catches a cold – especially one that severe – the rest of the world will be sneezing.
Investors draw transitory vs stagflation battle lines
The fate of U.S. financial markets this year will largely depend on whether any tariff-fueled inflation turns out to be “transitory”, enabling the Federal Reserve to cut interest rates, or whether the central bank gets bogged down by the specter of “stagflation”.
The first scenario is the one Chair Jerome Powell outlined on Wednesday as the central bank’s “base case”, sparking a powerful rally on Wall Street and a sharp drop in Treasury bond yields. So it’s risk on, right?
Investors chose to ignore the second scenario, even though it is arguably the more obvious one to draw from the Fed’s revised economic projections.
Policymakers are now expecting higher inflation and meaningfully slower growth. The median interest rate ‘dot plot’ was unchanged from December, still pointing to two cuts this year, but there’s a shift underway – eight policymakers now think one cut or none at all will be appropriate this year. So, risk off?
‘Team transitory’ may have stolen a march on ‘team stagflation’, but a lot of stars will need 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 keep rates higher for longer precisely because 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 caused by President Donald Trump’s 1.0 trade war was transitory. Academic studies suggest the first-round impact of Trump’s 2018 tariffs added up to 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 may be leaving himself and the institution open to further attacks if any future price increases prove to be stickier than bargained for.
This is a genuine risk because Trump’s proposed tariffs are of a whole 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 2.2 percentage points to core PCE.
This would 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 believe price risks are still skewed to the upside.
STAGFLATION SPECTER
It’s also worth noting that Fed officials lowered their growth projections significantly more than they raised their inflation outlook.
The 2025 growth outlook fell to 1.7% from 2.1%, and down to 1.8% for the next two years. Granted, that’s still decent growth and nowhere near a recession, but it would mark the first back-to-back years of sub-2% expansion since 2011-12.
Moreover, 18 out of 19 Fed officials see growth risks still tilted to the downside, compared with only five in December. Even if the Fed does cut rates, it is just as likely to be in response to the economy rolling over and unemployment shooting up than anything else. Would that be ‘risk on’?
While no one is talking about a return to the 1970s, stagflation risks are rising, which hugely complicates the Fed’s reaction function. The bar for cutting rates is getting higher, and it is difficult to see how this creates a positive environment for risk-taking – that is, unless team transitory emerges victorious in the end.
What could move markets tomorrow?
If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.
I’d love to hear from you, so please reach out to me with comments at . You can also follow me at [@ReutersJamie and @reutersjamie.bsky.social.]
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(By Jamie McGeever, editing by Diane Craft)
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