Stocks slump after Powell warns that we’re “early days” of tariff-driven inflation

The Federal Reserve kept rates unchanged at a range of 4.25% to 4.5%, as was nearly universally expected by economists.

In the statement, monetary policymakers noted that US economic growth “moderated in the first half of the year.” Previously, they had described the expansion as “solid.”

Stocks and bonds were little changed in the immediate aftermath of the decision, but not for long. The SPDR S&P 500 ETF slumped to session lows, falling 0.5% after being up as much as 0.4%, as Fed Chair Jay Powell warned that more tariff-fueled inflation would be in the offing and said it was his view that the economy calls for “moderately restrictive” monetary policy for now.

That caused traders to no longer price in a full 25-basis point interest rate cut by October, and two-year Treasury yields jumped from a low of 3.86% to as high as 3.94%. The Dollar Spot Index extended its daily gain to 0.9%.

“Powell wanted the market to be data dependent coming into an important few months of data. 50/50 odds of cutting or holding in each meeting for the rest of the year is a nice benchmark for that given where we are now and what the June baseline was,” said Peter Williams, an economist at 22V Research. “That is what we’re ending up with after his honest descriptions of the risks around the baseline, the inflationary pressures, and labor market data.”

In this decision, the central bank broke a 259-meeting streak in which fewer than two Fed governors dissented.

Governors Michelle Bowman and Christopher Waller preferred a 25-basis point cut at this meeting.

Both have publicly disagreed with the thrust of the committee before. In September, Bowman had delivered a hawkish dissent, believing the central bank should have lowered rates by only 25 basis points rather than 50 basis points. Waller, for his part, disagreed with the central bank’s decision in March to slow the pace its balance sheet would shrink at. Bowman and Waller were both appointed by President Trump during his first term.

Heading into the decision, about 44 basis points of easing were priced in by year-end, per Fed funds futures. That’s loosely aligned with the central bank’s June dot plot, which showed the median official anticipated 50 basis points of easing by the end of 2025 if the economy unfolded in line with expectations.