Federal Reserve Chair Jerome Powell faces the challenge of assuring investors that the economy remains stable while signaling the Fed’s readiness to act if needed. Despite Powell’s confidence, markets remain volatile due to President Donald Trump’s escalating trade war, which has weakened stocks, lowered bond yields, and dampened consumer sentiment.
The Fed is expected to hold interest rates steady at its March 18-19 meeting, but traders anticipate up to three rate cuts this year, starting in June. Economists, however, predict two reductions. If the Fed signals only two cuts, Powell must emphasize its flexibility to respond to labor market weakness.
Market concerns have grown as Trump describes the economy as in “transition,” while Treasury Secretary Scott Bessent warns of a necessary market “detox.” The two-year Treasury yield has dropped nearly 60 basis points since January, while the S&P 500 has declined 10% from its peak. Inflation expectations remain high, limiting the Fed’s ability to cut rates unless labor market weakness becomes clearer.
New economic projections may show slightly lower growth forecasts and a modest rise in core inflation expectations. Powell will likely stress that while the Fed remains ready to act, it needs firm evidence of inflation trends and economic slowdown before adjusting policy.
Complicating the outlook are potential Trump administration policies, such as tax cuts and deregulation, which could boost both growth and inflation. The Fed is watching for their overall impact before making any moves. Powell recently stated that the economy remains “in a good place” and that the Fed can afford to wait for more clarity before taking action.
Investors are also watching for signs of a pause in the Fed’s balance sheet reduction (QT), especially amid debt ceiling uncertainty. With markets on edge, Powell’s message will be closely analyzed for signs of the Fed’s next steps.