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Jeff will reveal how it works tomorrow, May 7, at 1 p.m. ET. If you’d like to learn more, be sure to sign up to attend his briefing. You can do so with one click right here.
The Federal Reserve kicked off its May meeting today. Its interest rate decision is due tomorrow.
Fair to say that the market will be hanging on Fed chair Jerome Powell’s every word.
Most don’t expect the Fed to cut rates this week. Yet the market will be keen to hear Powell’s thoughts on the economy and the prospect of future rate cuts.
As we discussed yesterday, consumer and business sentiment is showing a sharp deterioration as the trade war intensifies.
That comes as manufacturing activity contracts and job openings decline…
March’s 7.2 million job openings represented an 800,000 fall since November. That’s a 40.5% drop from the COVID peak.
So today, let’s look at the dilemma facing the Fed… and what that might mean for the stock market…
Sharp Recovery
The market continued its recovery rally last week due to talk of thawing relations between the White House and China.
Plus, we saw a succession of earnings beats… Four of the Magnificent 7 beat earnings estimates.
Data on Friday also showed the economy had added more nonfarm payroll (NFP) jobs than expected. And unemployment remained steady at 4.2%.
You can see the S&P 500’s (SPX) sharp recovery in the chart below…
S&P 500 (SPX)
Source: e-Signal
SPX fell off a cliff after Trump’s “Liberation Day” tariff announcements. But now the index has gained around 17% from its April 7 low.
It was recently trading around the same level as before those tariffs announcements (orange line).
That puts the SPX at a critical level as the Fed’s meeting gets underway…
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Playing Catch-Up
SPX’s recovery is welcome to investors. Yet it also leaves them exposed if sentiment suddenly turns.
Perhaps relations with China will turn for the worse again. Or Powell could take rate cuts off the table.
And the Fed is fighting its own recent history…
Recall that when inflation reared its head from 2021 through 2022, the Fed convinced itself that inflation was “transitory.” Things would return to normal of their own accord.
So when inflation proved sticky, the Fed played a massive game of catch-up. In 16 months, it ratcheted rates higher 11 times, taking rates from 0.25% to 5.50%.
Now the Fed fears cutting rates too soon. That could cause inflation to reignite and get out of control.
It has already cut rates by 100 basis points (to 4.5%) since September 2024. So the Fed is likely going to sit tight until a fuller economic picture starts to unfold… no matter how much pressure President Trump puts on Jerome Powell.
The Fed needs confidence that inflation remains in check – even when tariffs and tax cuts flow through the economy. Until then, it will remain reluctant to act.
The bigger fear is if the Fed needs to cut rates to prop up a flailing economy despite inflation still sitting well above its 2% target.
And that’s why investors need to approach this market with the utmost caution…
While any rally is welcome, it could be just another blowoff before the market takes another leg down.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. As I mentioned last week, we’re about to launch a new addition to Trading With Larry Benedict… a way for you to hear directly from me at one of the most important moments of the day for traders…
Right before the market open.
You’ll get to see exactly what I’m paying attention to as the trading day starts.
I can’t wait to see what you think… I’ll have more details to share in the coming days.