Stocks rallied Wednesday after the Federal Reserve reiterated expectations for two interest rate cuts later this year. Under the surface, though, the Fed’s outlook was less-than-great, making the market reaction somewhat counterintuitive. The S & P 500 and the Nasdaq Composite ended the day more than 1% higher. The Dow Jones Industrial Average popped more than 300 points, or 0.9%. But that reaction may have been premature as “gloom [is] seeping into the Fed forecasts,” according to JPMorgan. “The Committee’s growth and inflation forecasts for this year were revised in a stagflationary direction,” wrote chief U.S. economist Michael Feroli, referring to the central bank’s policy-setting Federal Open Market Committee. Indeed, the FOMC lowered its economic growth outlook for 2025 to 1.7% from 2.1%. At the same time, Fed officials said they see core prices rising at a 2.8% annual pace, up from a previous estimate of 2.5%. Then in the news conference following the Fed meeting, Chairman Jerome Powell “indicated that a good part of those revisions were due to trade policy developments. In addition, the FOMC’s perceived bias of risks to those forecasts indicates that further downward revisions to growth and upward revisions to inflation are quite possible.” Investors seem to be coming to terms with this reality. Stock futures on Thursday fell heading into the open, with contracts tied to the Dow losing more than 200 points, or 0.5%. S & P 500 and Nasdaq-100 futures lost 0.6% and 0.7%, respectively. Feroli still expects the Fed to cut twice later this year, but Bank of America senior U.S. economist Aditya Bhave thinks the outlook needs to substantially shift for in order for rates to come down. “Our perspective is that with inflation already above target, the Fed has no margin for error on the price stability mandate. This is a fundamental difference between the current situation and the 2018-19 trade war, when the Fed responded to the trade uncertainty shock by cutting rates. Back then, inflation was below target, so the Fed could afford to lean in a dovish direction. Today, it does not have that luxury,” Bhave wrote. Elsewhere Thursday morning on Wall Street, JPMorgan upgraded Cava Group , a chain of Mediterranean fast-casual restaurants, to overweight from neutral. “CAVA has significant U.S. white space for expansion from its already multi-market success, is generating [free cash flow] unusually early, and has considerable near-term operational and brand initiatives to drive both sales and profits,” analyst John Ivankoe wrote in a note to clients. “We view the stock as a ‘buy now and own for the long-term.'”
Fed forecast was gloomy, making the market’s initial response puzzling
