A relatively calm day on the stock market turned turbulent after Jerome Powell made clear the US Federal Reserve remains on war-footing against inflation, even if that means risk assets suffer.
It was a message equity investors weren’t expecting after two weeks of volatility following President Donald Trump’s unveiling of punitive tariffs on scores of countries. A violent selloff that gave way to the best one-day rally since 2008 had investors anticipating the Fed chair would indicate a willingness to step in if the economy showed signs of weakness.
“People were looking for the Fed to say we will cut, but Powell saying we need to study this is a disappointment,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. “He is talking about unemployment, but he is not talking about how the Fed is going to ride to the rescue with rate cuts.”
The Fed chair said he expects inflation to rise because of Trump’s tariffs, which will likely also put the labour market under pressure. Powell and other Fed policymakers have expressed support for holding rates steady as they try to sort out the impact from the administration’s incoherent trade policies.
The S&P 500 slid 3.2% in the biggest drop since April 10, widening its decline from a February record to 15%. The Nasdaq 100, already under pressure after some of Nvidia Corp’s chips came under export restrictions.
Of course, the Fed is not abandoning stock and bond investors. Boston Fed President Susan Collins said last week the central bank would “absolutely be prepared” to help stabilize the financial markets if needed. For Powell, though, that time is not now.
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“The market doesn’t like surprises,” said Thomas Thornton, founder of Hedge Fund Telemetry LLC. “So Powell is standing firm on making any cuts or even a dovish signal. Powell is not seeing markets liquidity, plumbing, or banking issues. Everyone including the Fed is just waiting to see what happens.”
The selling sent 10 of the 11 S&P 500 sectors lower, with only energy producers advancing. Tech shares in the index plunged more than 5%. Nvidia sank almost 10%. The Philadelphia Semiconductor Index lost just under 7%.
“The market was under pressure with all the news about Nvidia and tech in general selling off after having a pretty good run here over the course of the last few days,” said Art Hogan, chief market strategist at B Riley Wealth Management. “So coming into it you were kind of set up with a negative posture, and this is certainly adding a little fuel to the fire.”
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The Cboe Volatility Index pushed up to 34. Treasuries took some reassurance from Powell’s comments that he sees no issues with financial market stability, sending the 10-year yield lower on the day.
That did little for equity investors left wondering what it will take to get a sustainable move higher after the S&P 500 plunged to the brink of a bear market. Already, Trump and his team have made clear that they intend to administer “medicine” as they attempt to redesign the world’s trade.
“Sentiment toward US risk assets showing all the signs of long-term scarring,” said Gareth Ryan, managing director at IUR Capital. “If no significant progress is made on trade talks with major US trade partners in the next 90 days, we could be in for a rough summer period for equity markets.”
The Fed, like virtually everyone outside of the administration, is left waiting to see how the new policies play out. To Powell, that means leaving rates unchanged.
“They don’t need to cut right now to save the equity market - that is not in their mandate unlike what people might think or hope,” Thornton said.
