Fed has no map for tariff trouble, leaves traders in limbo

A tug of war over what’s next for the U.S. economy, interest rates, and the stock market is underway, and nobody seems to know which way it will go.

That uncertainty was on full display at the Federal Reserve’s latest meeting, where Chair Jerome Powell said “uncertain” nearly 20 times in different ways during his post-meeting news conference. Investors hoping for a clear signal on when the central bank might begin cutting rates instead heard a firm “we don’t know.”

As Bloomberg reported, traders had looked to the Fed for guidance amid growing risks, from higher Middle East tensions to renewed U.S.-China trade friction. Instead, they got a reminder that the bank needs more evidence before it feels safe trimming its benchmark rate.

Scott Ladner, chief investment officer at Horizon Investments, summed up the mood. “If anything, the Fed’s read-and-react stance showed just how clueless everyone is right now,” he said. “As an investor, you cannot trade this, you cannot get ahead of it.”

The S&P 500 is less than 3% below its record high, yet it’s barely moved all month. There have been only two days with moves of more than 1%, and the index has barely shifted over the past two weeks, despite a sharp rise in oil prices and a weaker dollar.

Conflicting headlines leave traders stuck in limbo

On Thursday, a U.S. market holiday, S&P futures fell more than 1% in early trading after reports that officials were preparing for a possible strike on Iran. When former President Donald Trump said he preferred diplomacy, the slide paused.

Then on Friday morning, Fed Governor Christopher Waller suggested rate cuts could begin as early as July, sending futures higher as the regular session opened. Those gains faded, however, after missile exchanges between Iran and Israel and updates that the Trump administration planned restrictions on Chinese semiconductor plants. At market close, the index was down 0.2%.

“The S&P 500 is not breaking out one way or another because we’ve got crosswinds,” Ladner said.

Fed officials held rates steady this week, with most voting members expecting two quarter-point cuts this year. But those projections are just educated guesses, as inflation may be higher than expected, and it’s unclear how strong the job market will be with rising global risks

“No one holds these rate paths with a lot of conviction,” Powell said. “We expect a meaningful amount of inflation in the coming months, and we have to take that into account.”

Investors are positioning accordingly. Deutsche Bank strategists, led by Parag Thatte, report that overall equity positioning has slipped this week, with discretionary managers moving from slightly below neutral to noticeably underweight. Now, stock bets are in the lower-middle of their usual range.

Fed has no map for tariff trouble

“The Fed too is facing an uncharted territory,” said Bill Sterling, global strategist at GW&K Investment Management. He noted that modern history offers no easy model for the current level of tariff hikes between major economies.

“Long-term investors will be wise not to make abrupt shifts in portfolio allocations due to news headlines,” Sterling said.

The factors that fueled 20% gains in 2023 and 2024, AI excitement, strong earnings, and a solid consumer, are still in place. However, worries about policy, geopolitics, slower growth, and consumer strain are keeping stocks from moving higher.

In its new forecasts, the Fed cut its 2025 growth projection and raised its estimates for unemployment and inflation. Recent data indicated mixed signals. U.S. factory activity shrank in May for the third straight month. Industrial production fell again, imports dropped to a 16-year low, hiring cooled, and retail sales were the weakest since January.

Yet the May consumer price index rose less than economists expected for the fourth month running, suggesting tariffs have not yet pushed up consumer prices.

All of which leaves traders facing a steep challenge as they try to prepare for the second half of 2025. “The Fed has laid out its reaction function,” said Kevin Brocks of 22V Research. “But investors will have to wait and see what the impact of tariffs on inflation actually is.”

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