US stocks hold ground despite Powell’s stagflation warning

U.S. equity markets remain buoyant, even as Federal Reserve Chair Jerome Powell warned that the risks of rising inflation and unemployment have increased due to President Trump’s aggressive trade policies. The Fed’s latest policy meeting largely met expectations, with interest rates left unchanged and officials maintaining a cautious “wait-and-see” stance. Given the uncertainty over the status of tariffs after the current pause expires on July 8, the Fed is understandably reluctant to make forward commitments that could box it in.

Interestingly, despite the Fed’s acknowledgment of elevated risks, market expectations for future rate cuts have remained largely steady. The probability of a cut next month has dropped to just 20%—a likely reflection of doubts that the Fed will act before tariff clarity returns. Still, confidence remains high that three cuts will materialize before year-end. The fed funds rate is still projected to end 2025 around 3.5%, nearly unchanged since Liberation Day.

Source: refinitiv

Equities Rally on Trade Hopes and Tech Optimism

This resilient rate outlook has helped equities maintain an upward bias despite the Fed’s stagflation concerns. Optimism around ongoing U.S.–China negotiations to resolve tariff issues continues to offer support. Additionally, reports that the Trump administration may lift restrictions on semiconductors used in artificial intelligence further bolstered sentiment. Aa result, the S&P 500 is attempting another go at breaking above recent resistance at 5,695, where it has faced rejection several times in the past few months.

S&P 500 daily chart

Past performance is not a reliable indicator of future results.

Powell's Tone: Cautious or Hawkish?

Powell’s remarks, however, could be interpreted as a hawkish warning. He indicated the Fed is prepared to keep rates elevated longer if necessary, raising the risk of market disappointment if rate cuts are delayed. The current pricing of three cuts in 2025 and only five meetings remaining appears to suggest that markets believe tariffs will significantly slow growth without reigniting inflation. Recent economic data seems to support this view: GDP has weakened while inflation has softened. However, the Fed attributes part of the GDP decline to a temporary distortion—namely, a surge in imports during Q1 as businesses front-loaded orders ahead of possible tariff increases.

Discrepancy Between Markets and the Fed

This sets up a potential disconnect between market pricing and Fed projections. According to the central bank’s March Summary of Economic Projections, officials anticipate two rate cuts this year, totalling 50 basis points—implying a year-end fed funds target range of 3.75%–4.00%. Whether this forecast will be revised in next month’s updated projections remains to be seen, but Powell’s cautious tone suggests a shift is unlikely.