Good morning! The S&P 500 just had its best Fed-decision day since July, even though the Fed did exactly what everyone expected it to — below we decode what to know. Was this email forwarded to you? Join 190,000 self-directed investors who trust us for their financial news every morning. Sign up here. 

Today we have a guest column from Jack Farley, one of the best macroeconomic minds in the business. He is the host of the Monetary Matters podcast, and his interviews have seen over 30 million downloads across platforms. Tune in on Spotify and YouTube.

Powell to the rescue

Stagflation isn’t here yet, but Jerome Powell seems to see both the “stag” and the “flation” creeping closer.

The stock market, however, isn’t bothered.

The S&P 500 surged more than 1% higher Wednesday, with most of that coming after the Federal Reserve released its Summary of Economic Projections (SEP) and announced it would hold interest rates unchanged in the 4.25-4.5% range, as expected.

According to the updated outlook, central bankers expect headline inflation will run at 2.7% for 2025 — above the 2.5% they forecasted in December and far higher than their 2% target. At the same time, the Fed now expects real GDP growth to run at 1.7%, down from its prior 2.1% estimate.

The outlook gets gloomier the deeper you dig. Scrolling to pages 10 and 12 of the Fed report, we can see that 18 of the 19 meeting participants see inflation risks skewed to the upside (bad), 18 of 19 assess risk to real GDP to the downside (bad), and 17 of 19 assess risk to unemployment to the upside (also bad).

Another way to think about it: Fed members had 56 chances to say whether risks relative to their projections were positive, balanced, or negative.

They chose negative 95% of the time.

Despite that, the Fed’s median projection for interest rates did not move at all. It still predicts two rate cuts in 2025.

Why did stocks rally?

One theory that holds weight is that while the SEP weakened compared to previous one, the market was still expecting far worse.

The bears who were positioned for a bigger drop were caught off-side and forced to ditch their hedges. Meanwhile, money managers, who have been shifting from US stocks to foreign markets the last month, suddenly realized they were underweight on a winning play.

On the other hand, perhaps some were simply relieved that the Fed wasn’t going to raise interest rates, a move that’s been floated amid tariff-related inflation concerns.

Powell noted it was his “base case” that any tariff-related price increases would be transitory and so the Fed was likely to “see through” them rather than fight them as legitimate stick inflation.

To be clear, headwinds for risk assets remain. The tariff news that market participants have so far interpreted negatively are set to weigh on stocks until more clarity on the reciprocal tariffs due April 2.

Of course, President Trump’s “Art of the Deal” offers the counterpoint here.

If he extracts concessions from trade partners, and tariff rates actually go down rather than up, it would be potentially very bullish for stocks.

Even if he achieves marginal gains, he could still take it as a victory and skip the reciprocal tariffs, which would be similarly bullish.

Big picture

It’s important to note that while the Fed projects a weaker economy, the forecasts do not imply a weak one. Real GDP of 1.7% is hardly anemic, given that it’s averaged just over 2.6% for the past 40 years.

In any case, it is clearer than ever that Trump’s fiscal policy — rather than Powell’s monetary policy — is driving the economy and markets. 

That means the Fed will have to react to the decisions of a president whose ambitions go far beyond short-term stability in the stock market.

For more of Jack Farley’s insights on markets and macro, follow him on X.

Market snapshot:

Elsewhere:

💰️ The Fed will slow its balance sheet runoff process. The central bank starting next month will moderate its pace of balance sheet drawdowns, policymakers announced Wednesday. In April, the monthly cap of Treasuries that will be allowed to mature and not be replaced will drop from $25 to $5 billion. (Reuters)

🎙️President Trump talks crypto this morning. I’m attending the Digital Asset Summit in NYC to watch Trump address the audience as the first-ever sitting president to speak at a cryptocurrency conference. I’ll be sharing live updates on X.

📉 The Fed news means borrowing costs aren’t coming down. The benchmark interest rate is what lenders use to set rates on credit cards, loans, and auto financing. With the central bank expected to lower rates between one and two times in 2025, it means individual borrowers won’t get much relief. (CNBC)

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About me:

📰 I’m Phil Rosen, co-founder and editor-in-chief of Opening Bell Daily. I’ve published books, lived on three continents, and won awards for my journalism, which has appeared in Business Insider, Fortune, Yahoo Finance, Bloomberg and Inc. Magazine.

I write our flagship newsletter to prepare you for each trading day, unpacking markets, economic data and Wall Street with analysis you won’t find anywhere else. Feedback? Reply directly to this email, ping me on X @philrosenn, or write me phil@openingbellmedia.com.