Stocks showed little movement following the Federal Reserve’s decision to maintain interest rates at current levels, although Chair Jerome Powell warned that rate cuts could still be possible later this year. Investors paid close attention to Powell’s comments highlighting that the effects of increased U.S. tariffs have yet to fully impact the economy. Meanwhile, escalating conflict between Israel and Iran added uncertainty as markets awaited clarity on possible U.S. involvement.
Market Reaction to Fed Announcement
On Wednesday, the S&P 500 finished nearly unchanged as investors digested the Fed’s choice to keep rates at 4.25% to 4.5%. The Nasdaq inched up 0.1%, while the Dow Jones slipped slightly by 0.1%. Ongoing concerns about instability in the Middle East weighed on sentiment.
Middle East Violence Escalates
On Thursday, Israel launched an airstrike targeting a key Iranian nuclear site in Arak, while Iran responded with missile strikes on an Israeli hospital. This marks the most intense flare-up of violence in a week, with both sides targeting military and civilian locations. President Trump remained noncommittal on U.S. involvement, stating, “nobody knows what I’m going to do,” and mentioning missed diplomatic opportunities with Iran. Some of Trump’s supporters have urged caution, warning against further military entanglements in the region.
Oil prices rose modestly amid fears that the conflict could disrupt vital crude shipping routes.
Fed Signals a Careful Approach to Future Rate Moves
Though holding rates steady, the Fed reiterated plans for a potential 50 basis-point cut in 2025, in line with previous forecasts. However, it slowed the pace of expected reductions in 2026 and 2027, suggesting a longer effort may be needed to tame inflation.
Powell cautioned that Trump’s tariffs could soon lead to a “meaningful” rise in consumer prices. He also noted considerable uncertainty about the path of future rates, as tariffs could reignite inflation pressures, dampen labor demand, and slow economic growth.
The Fed now projects inflation will end 2025 at 3%, economic growth to slow to 1.4%, and unemployment to tick up slightly to 4.5%, hinting at a modest stagflation environment.
Bank of England’s Decision in Focus
Attention turns to the Bank of England on Thursday, where rates are expected to remain at 4.25%. Recent inflation figures showed a slight easing to 3.4% year-on-year in May but still above the BoE’s 2% target. Monthly inflation rose 0.2%, a slowdown from March’s sharp spike. Analysts anticipate the BoE will carefully consider recent inflation trends and trade developments before making policy changes.
Trump Endorses Stablecoin Regulation Bill
Separately, former President Trump applauded the Senate’s passage of the GENIUS Act, which aims to regulate stablecoin cryptocurrencies, urging the House of Representatives to approve the bill swiftly. The legislation is designed to enforce reserve requirements and transparency for stablecoin issuers, positioning the U.S. as a leader in digital asset regulation. Stablecoins, which are cryptocurrencies pegged to traditional currencies like the U.S. dollar, play a key role in crypto transactions and payments.