Tariff-wounded stocks find no balm with Jerome Powell remarks on interest rates

Investors who may have been hoping the Federal Reserve is poised to come to the aid of tariff-rattled markets took away an unwelcome message from the central bank's chief on Wednesday: the Fed may be in a bind.

Fed Chair Jerome Powell said the US central bank would wait for more data on the economy's direction before changing interest rates. Speaking to the Economic Club of Chicago, he noted that there was a potentially tough situation developing for the Fed in which inflation is pushed higher by tariffs while growth and potentially employment weaken.

Investors fear continued elevated inflation will hamstring the Fed, which would typically cut rates to shore up a weakening economy but would be reluctant to do so because of fears it would lead to surging inflation.

Investors said Powell's comments were more hawkish than expected for markets that have been whipsawed in recent weeks by President Donald Trump's sweeping tariffs, which are raising concerns about a looming economic downturn.

"I think the market was hoping for more of a dovish signal from the Fed that they're getting closer to cutting" interest rates, said Michael Arone, chief investment strategist at State Street Global Advisors. "And he didn't provide it."

Since Trump's April 2 tariff announcement, stocks have endured some of their most volatile trading since the onset of the COVID-19 pandemic five years ago.

Investors and companies are struggling to determine the economic fallout, with the tariff situation very much in flux as Trump has paused hefty levies on many countries while a trade battle with China escalates.

The benchmark S&P 500 ended down 2.2% on Wednesday - bringing the total decline from its February record high to 14% - while the tech-heavy Nasdaq Composite slid 3.1% on the day.

The Fed is in a "very tricky position" because of its dual mandate goals of seeking maximum employment and stable prices, said Mark Malek, chief investment officer at Siebert Financial.

Powell "finally acknowledged that tariffs will cause some kind of inflation this year, that it certainly can lead to a pullback in capital expenditure and an increase in unemployment," Malek said.

"They need to keep unemployment low and prices down, and now both sides of the coin are going the wrong way for the Fed."

Trump wants rates cut

On Thursday, Trump said that the termination of Powell's tenure "cannot come fast enough," while calling for the central bank to cut interest rates.

Traders on Wednesday did keep bets on Fed rate cuts this year. That included betting the Fed resumes cuts in June and that by year-end the policy rate, currently in the 4.25%-4.50% range, will be nearly a full percentage point lower.

Powell also made remarks about a "Fed put," where the central bank will step in if markets plummet, that may have spooked markets, investors said.

Asked if there is a "Fed put", Powell said no, while offering an explanation. He said that markets are struggling with uncertainty and volatility, but are functioning and orderly.

Powell's comments could be interpreted as "don't necessarily rely on the ‘Fed put’, meaning, don't rely on the Fed to sort of bail us out of this situation," said Sam Stovall, chief investment strategist at CFRA Research. "Maybe that was sort of an indication that, gee... we really don't have the safety net.”

Stocks were already weak heading into Powell's afternoon comments, although the slide accelerated following his remarks. Major indexes were dragged lower by technology stocks after Nvidia warned of steep charges from new U.S. curbs on its chip exports to China.

Some investors said Powell might have just been confirming the scenario markets were already worried about - a slowing economy combined with inflationary pressures.

"He's suggesting that it is going to be potentially difficult economic times if the tariffs stay at these levels," said Rick Meckler, partner at Cherry Lane Investments. "I think that's something investors know. He's just highlighting it."