The Market Is Having Second Thoughts About What the Fed Said
Here's the key issue now for stocks as investors digest the Fed decision and Jerome Powell's words.
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Despite warnings about a very high level of economic uncertainty, the market reacted favorably to Fed Chair Jerome Powell Wednesday afternoon. The Fed cut GDP expectations and raised its forecasts for both inflation and unemployment, but Powell called the impact of tariffs on the economy "transitory" and was upbeat about continued economic strength.
The market jumped on the news, but volume was mediocre, and there was some late selling. The price action was not quite strong enough to produce a follow-through day using the Investors Business Daily criteria.
The key issue now is whether stocks will stay in the trading range that has developed since hitting a low one week ago. The indexes weakened early Thursday morning as investors digested the Fed decision.
The biggest obstacle to the market remains very elevated uncertainty. Measuring the impact of tariffs is tremendously difficult, especially since no one even knows what tariffs will ultimately be put into place or how long they will last. Economic forecasters are assuming that Trump will keep tariffs in place even if they create short-term economic havoc. While that is far from certain, forecasters can be prone to anticipate the worst-case scenario when analyzing Trump.
The economic uncertainty isn’t just a function of tariffs. There is concern that inflation is staying sticky, consumer sentiment is dropping, unemployment is starting to increase, and economic growth is slowing. So far, these problems have not been significant, but they have raised concerns that a recession may take place. It is now anticipated that the Fed could cut rates as many as three times later this year as the economy cools.
Technically, the market has been trying to generate a new uptrend after hitting a low last week. The action on Thursday will be particularly important as it will either confirm or deny the weak attempt at a follow-through after the Fed decision.
Weak action on Thursday could also create the possibility of a retest of recent lows, but a strong finish will add some traction to a possible uptrend. Early on Thursday, the sellers are active, but we have economic data coming up, and we’ll see if there is any dip-buying interest.
At the time of publication, Rev Shark had no positions in any securities mentioned.
