The Federal Reserve decided to keep interest rates steady on Wednesday but signaled that two rate cuts are still planned for later in 2025. The central bank acknowledged that economic uncertainty has increased, although overall growth remains solid. “The economy is strong overall and has made significant progress toward our goals over the past two years,” Fed Chair Jerome Powell said in a press conference.
“Labor market conditions are solid, and inflation has moved closer to our 2% longer-run goal, though it remains somewhat elevated.
Stocks rallied on the news, with the Dow Jones Industrial Average climbing nearly 400 points, or 0.92%, to close at 41,964.63. The S&P 500 jumped 1.08% to end at 5,675.29, while the Nasdaq Composite advanced 1.41% to settle at 17,750.79. Traders reacted positively to the Fed’s commitment to rate cuts this year and Powell’s assertion that the economy remains robust despite some signs of weakness in consumer spending and sentiment surveys.
He also noted that impacts from recent tariffs imposed by President Donald Trump are likely to be short-term. “The most important thing to recognize is that the information was almost exactly what people expected,” said Michael Green, chief strategist at Simplify Asset Management. “We’ve seen weaker inflation in summer and stronger inflation in winter and spring for two consecutive years, suggesting some residual seasonality that isn’t being properly captured.”
The Fed’s decision comes amid escalating trade tensions, as President Trump recently imposed levies on imports from Canada, Mexico, and China, leading to retaliatory duties.
Some tariffs on imports from Canada and Mexico are set to expire on April 2.
Fed holds rates, market reacts positively
Wednesday’s gains helped stocks rebound from a rough Tuesday, in which recent market sell-offs resurfaced.
The Dow and S&P 500 remain more than 6% and 7% below their recent highs, respectively, while the Nasdaq is approximately 12% off its record close. Fed Chair Powell’s optimistic remarks about the U.S. economy appear to have boosted more cyclical parts of the stock market. The financial sector rose 1.3% in late afternoon trading, according to FactSet.
The industrials sector increased by 1.5%, and the energy sector saw a 1.9% uptick. The major indexes traded around session highs on Wednesday afternoon during Powell’s press conference. The Dow climbed approximately 400 points, or 1%.
Small-cap stocks rallied, with the Russell 2000 jumping 1.7%. However, some economists warn that the risk of stagflation is increasing as central bankers navigate a “policy fog” prior to U.S. tariff impacts. “As growth prospects falter and inflation remains sticky, expect more worries about stagflation,” said LPL chief economist Jeffrey Roach.
Core inflation should decelerate by summer, allowing the Fed to cut rates at its June meeting.
Image Credits: Photo by Nicholas Cappello on Unsplash
