Federal Reserve Chairman Jerome Powell Just Delivered Fantastic News for Stock Market Investors

Ongoing geopolitical tensions in the Middle East have triggered a surge in oil prices, stoking fears of an inflation spike that could derail the U.S. economy. The last time inflation suddenly skyrocketed was in 2022, and it forced the Federal Reserve to raise interest rates so fast that the S&P 500 (SNPINDEX: ^GSPC) index plunged by more than 20%, entering a bear market.

The Fed has cut interest rates six times since September 2024, and Wall Street entered 2026 expecting further rate cuts. But rising oil prices and other economic indicators have forced analysts to adjust their forecasts, and the possibility of a future interest rate hike was recently on the table, which is one reason why the S&P 500 fell roughly 9% last month from its recent all-time high (it has partially recovered since the drop).

Fed Chairman Jerome Powell made a series of public remarks at Harvard University on March 30 that eased concerns about a potential rate increase; here's why that's great news for the stock market.

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The Fed's dual mandate is in conflict

The Fed has two main objectives. It aims to maintain an annualized inflation rate of around 2%, as measured by the core Personal Consumption Expenditures Price Index (PCE), and it aims to keep the economy operating at full employment, although policymakers don't have a specific target for the unemployment rate.

Core PCE has ticked higher over the last three months, from an annualized rate of 2.8% to an annualized rate of 3.1%. That means current inflation risks are twofold -- not only is the core PCE above the Fed's 2% target, but it's also trending higher. Policymakers would normally be raising interest rates in this scenario.

However, the job market is exhibiting clear signs of weakness. According to the latest nonfarm payrolls report from the Bureau of Labor Statistics, the U.S. economy lost a whopping 92,000 jobs in February. The unemployment rate is now 4.4%, which is near a five-year high.

Plus, in his prepared remarks following the Fed's March policy meeting, Powell said he thinks the U.S. private sector has created zero jobs over the last six months, after adjusting for overcounting due to disrupted data collection during government shutdowns. Raising interest rates could make the job market significantly worse, so the central bank is in a bind.

Powell just hinted at the Fed's next move

Oil is an input cost for any product traveling by land, air, or sea, so consumers could face higher prices not only at the gas station, but also at the grocery store and at their favorite retailers. This will almost certainly drive the core PCE higher in the coming months.

However, on March 30, Powell said the central bank usually tries to "look through" short-term supply shocks like the surge in oil prices. Interest rate adjustments take time to work their way through the economy, so a hike probably wouldn't have the desired effect until several months from now, when the geopolitical tensions in the Middle East might already be resolved.

Powell expressed satisfaction with the current level of interest rates, suggesting the Fed is likely to hold monetary policy steady as the current situation unfolds. However, it's worth noting that his tenure as FEd Chair is scheduled to officially end on May 15, when President Donald Trump's new nominee, Kevin Warsh, is expected to take the reins (if confirmed by the U.S. Senate). Therefore, the Fed's policy stance could soon change.

What it means for the stock market

When interest rates rise, companies can't borrow as much money to fuel their growth, and their interest costs increase, which is a headwind for their bottom line. This is bad news for the stock market, which is primarily driven by corporate earnings, so it's no surprise the potential for higher rates has contributed to a recent 9% decline in the S&P 500.

Investors will be relieved that interest rates are likely to remain on hold for the foreseeable future, but oil prices need to come down within the next couple of months for the Fed to maintain this policy stance. If tensions in the Middle East continue until the end of this year, high oil prices could trigger a spike in longer-term inflation expectations, which might warrant interest rate hikes in 2027.

In that scenario, the S&P 500 would likely remain under pressure, as it did in 2022 and 2023. Fortunately, this doesn't appear to be the most probable outcome.

The Trump administration has put forward a four-to-six-week timeline for the Middle East conflict, and since it is already in week five, tensions could soon wind down. In fact, the White House says the administration is close to achieving its objectives, and diplomatic negotiations appear to be happening in the background.

If there is a resolution in the near term, the S&P 500 is likely to recover some of its recent losses. Then, over the next couple of months, I would expect Wall Street to start predicting the resumption of interest rate cuts to deal with the softening job market, which should support further gains in the stock market.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.