Fed week arrives with high uncertainty and market volatility

Investors look to Fed Chairman Jerome Powell for guidance as Trump tariffs cause turmoil

Fed Chairman Jerome Powell has said the central bank is not rushing to cut interest rates despite an uncertain economic outlook. AP

US markets are poised to enter another volatile week of trading, with the Federal Reserve set to make its interest rate decision and reveal updated economic projections as President Donald Trump's tariffs continue to cloud the future of the world's largest economy.

Last week's remarkable row between Mr Trump and trading partners featured a dizzying set of tariff implementations, retaliations, threats and reversals that thrust markets into further turmoil.

“Right now, nothing seems to matter except what's going on in [Washington] DC and the confusing set of tariff news that seems to be released almost several times a day,” said Peter Andersen, founder of Andersen Capital Management.

The Dow Jones is down almost 3 per cent this year. The Nasdaq entered correction after falling more than 10 per cent from its recent record high. The S&P 500 briefly slid into correction territory on Thursday. In another sign of market volatility, the price of gold climbed above $3,000 for the first time on Friday.

“I think, investors don't have a grounding and they don't know what the endgame is,” Mr Andersen said. "I think, most investors are punch-drunk."

Policy uncertainty has seeped into the economic outlook. And with the Fed likely to hold rates steady on Wednesday, the economic impact of tariffs will face further scrutiny.

“The key question at this [Fed] meeting is how policymakers will balance the continuing unease about the frustratingly slow pace of disinflation progress with mounting concerns over the growth outlook, the usual uncertainties about the outlook compounded by a highly unusual degree of policy uncertainty,” Derek Tang, economist at the LH Meyer firm, said in a note to clients.

Fed officials have already signalled they are firmly in wait-and-see mode, meaning they are set to hold their target range for interest rates steady for a second straight time at 4.25 per cent to 4.50 per cent.

“We do not need to be in a hurry and are well positioned to wait for greater clarity,” Fed Chairman Jerome Powell said in his final public remarks before the central bank's quiet period.

With a pause likely, focus will instead turn towards Mr Powell's press conference and the Fed's economic projections. The Fed updates its forecasts on GDP, interest rates, inflation and unemployment every three months.

“The sheer amount of uncertainty around trade policy and fiscal policy is just suffocating for the economy, and there's no end in sight, so the Fed is going to likely factor that into their forecasts,” said Ryan Sweet, chief US economist at Oxford Economics.

Currently, Fed officials are trying to assess if the inflationary effects will be a one-time bump that they can look through. “My baseline view is that any imposition of tariffs will only modestly increase prices and in a non-persistent manner,” Fed Governor Christopher Waller said last month.

In separate remarks, New York Fed Governor John Williams anticipated that tariffs will have some inflationary effect this year.

Meanwhile, Mr Powell has asserted the economy remains in a “good place” despite the elevated uncertainty surrounding it. But as markets remain jittery over the effects of Mr Trump’s tariff approach, traders will look towards the even-keeled Fed Chairman to offer guidance on the economic outlook.

“He's got to pull this off where he signals that we're keeping an eye on the economy,” Mr Sweet said. "Things are holding up so far, but at the same time, saying that we're not going to ignore the inflation risk. He’s going to have to pull this one out of his hat and kind of get this one perfect, or you're going to see markets respond.”