Stock ETFs Rise as Powell Strikes Optimistic Tone on Economy
Fed Chair Jerome Powell expressed confidence in the economy and signaled patience on rate cuts, boosting markets despite lingering uncertainty over tariffs and inflation.
Stock ETFs rallied Wednesday after the Federal Reserve held interest rates steady, with Chair Jerome Powell expressing confidence in the U.S. economy while acknowledging heightened uncertainty.
The SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) gained 1.1% and 1.3%, respectively, following the announcement.
Powell highlighted continued economic growth and a stable labor market while reiterating the Fed’s belief that inflation will gradually ease despite some recent price pressures. However, he also acknowledged that trade policy and tariffs are adding to economic uncertainty.
“The new administration is in the process of implementing significant policy changes in four distinct areas—trade, immigration, fiscal policy and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy,” he said.
Tariffs in the Spotlight
Naturally, Powell fielded numerous questions on tariffs during the press conference. While he acknowledged the potential impact of tariffs on inflation, he wasn’t particularly concerned—at least, not yet.
The Fed chair noted that goods prices have increased in recent months, which could be related to tariffs—or just noise. He stressed the difficulty of isolating the impact of tariffs from broader inflation trends.
“It is going to be very difficult to have a precise assessment of how much of inflation is coming from tariffs,” Powell said. “Some of it—clearly some of it—a good part of it is coming from tariffs. But we will be working, and so will other forecasters, to try to separate non-tariff inflation.”
Despite the prospect of higher import levies, Powell continually emphasized that the Fed’s base case remains for inflation to trend lower and for growth to remain solid, while noting that uncertainty remains high.
Fed’s Economic Projections Hold Steady
The Summary of Economic Projections, released alongside the Fed’s monetary policy statement, showed little change in forecasts for longer-run inflation and economic growth.
The median projection for core PCE inflation in 2025 is now 2.8%, up from the 2.5% projection in December.
However, inflation is still expected to decline to 2.2% in 2026 and 2% in 2027, in line with the previous forecast.
The unemployment rate is projected to average 4.4% this year, slightly above the Fed’s 4.3% estimate in December, but 2026 and 2027 unemployment forecasts remain unchanged at 4.3%.
That said, Powell cautioned against placing too much confidence in these projections, given the current economic climate.
“What would you write down? It's really hard to know how this is going to work out,” Powell noted.
Will the Fed Cut Rates?
Given that uncertainty, Powell said he sees little need to shift monetary policy abruptly. “We’re not going to be in any hurry to move. We’re well positioned to wait for further clarity.”
The Fed’s current projection includes two rate cuts this year, though Powell cautioned that such forecasts carry significant uncertainty.
“We’re at a place where we can cut or we can hold,” he said.
Interestingly, the Fed Chair did not mention rate hikes as an option, a signal that seemed to encourage at least some bullish investors.
Consumer Sentiment & Market Reactions
While he emphasized that the economy remains in good shape, Powell acknowledged that consumer sentiment has deteriorated sharply—though he cautioned against reading too much into it.
“Unemployment is 4%, inflation is 2%, but people are unhappy because of the price level”—the fact that prices went up a lot over the last few years, Powell said.
Despite the gloomy sentiment, Powell does not believe this necessarily signals a downturn.
“There are times people are saying very downbeat things about the economy and then going out and buying a new car. But we don't know that that will be the case here.”
Powell stated that the Fed does not make recession forecasts but noted that, historically, there is always about a one-in-four chance of a recession in any given year.
He acknowledged that some external forecasters have slightly raised their recession probabilities, but they remain at “relatively moderate levels.”
As for stagflation, Powell dismissed the idea that the U.S. is heading in that direction.
Following the Fed’s comments, bond prices rallied and yields fell. The 10-year Treasury yield was last trading down by four basis points to 4.25%.
