On Wednesday, the Federal Reserve left interest rates unchanged.

But it did confirm that we can expect two 0.25% rate cuts later in the year. That gave the market a much-needed shot in the arm.

The rebound on Wednesday was a welcome relief for investors who’d watched a 10% correction unfold in less than a month. After all, back on February 19, the S&P 500 and Nasdaq were hitting all-time highs.

Yet the Fed’s economic projections caught my attention…

They point to major factors that will determine where the market is headed in the long term.

So today, I want to look beyond the immediate price action to see how things could play out from here…

Slowing Growth

The Fed’s forward projections on Wednesday show just how quickly things have changed. And they hint at the pressure the Federal Reserve Board is under.

Before the meeting, President Trump had already been calling for the Fed to cut rates. He called for cuts again after the Fed decided to sit tight on rates for now.

The Fed is dealing with a major challenge… a slowing economy. That will keep the White House nipping at its heels.

The U.S. economy had grown at 2.3% in Q4 2024. (That was down from 3.0% and 3.1% in Q2 and Q3, respectively.) And the Fed had forecast GDP growth of 2.1% by the end of this year.

But that has been adjusted down to 1.7%. Additionally, forecasts put us at 1.8% GDP growth at the end of 2026 (down from 2.0%).

Other key metrics are also heading the wrong way…

Projections show unemployment reaching 4.4% by the end of this year. That’s slightly up from its 4.3% forecast and the current 4.1% rate.

But the kicker is the ever-present “sticky” inflation that just won’t seem to go away… and frustratingly remains out of reach of the Fed’s 2% target.

The Fed now expects its preferred inflation gauge, Core Personal Consumption Expenditures (PCE), to reach 2.8% by the end of this year – up from the previous 2.5% forecast. (Core PCE strips out the volatile food and energy sectors.)

Put simply, inflation and unemployment are rising right as economic growth slows. That means the situation facing the Fed is only going to get tougher…

So what am I expecting from here?

Competing Narratives

Right now, the Fed is stuck in a bind…

On the one hand, it faces the prospect of dealing with rising inflation. That would ordinarily keep upward pressure on rates…

At the same time, unemployment is ticking higher as the economy slows – a scenario that would typically lead to rate cuts.

Until one of these becomes the dominant narrative, we can expect the Fed to remain neutral… Markets will swing about off the back of economic releases… as well as any policy announcements or surprises from the White House.

The other factor, of course, is the trade war. We don’t know how far it will reach… or what the final impacts will be.

That’s why I warned right at the start of the year:

We all know about Trump’s proposed tariffs. But the market underestimates how big their impact might be. More expensive imports will send prices (and inflation) higher.

So I expect the U.S. economy to start strong in 2025. But it will weaken as the impacts of those tariffs start to bite. And this is going to cause a lot of uncertainty.

The market is priced for perfection right now. So this uncertainty will challenge stocks’ lofty valuations.

My prediction has been right on the money…

While it’s likely that the U.S. will come out on top in the trade war, we can’t underestimate the resilience and reach of China… nor the ultimate impact on U.S. stocks and the economy.

Until that’s resolved, volatility is going to keep ratcheting higher… And we’re going to continue to see big swings.

Yet those exact swings are why I’m looking forward to the rest of 2025.

This sort of market only presents itself every once in a while… but it can lead to serious gains. You just have to know how to trade it.

If you’d like me to show you how, then be sure to click here…

Regards,

Larry Benedict
Editor, Trading With Larry Benedict