Federal Reserve's future policy path 'highly uncertain' as Powell downplays forecasts on heels of Trump unknowns

The Federal Reserve continued to signal it will cut interest rates two more times this year, with Fed Chair Jerome Powell adopting a perceived dovish stance, a pleasant surprise for investors who came into Wednesday’s policy decision with heightened fears over “stagflation” and the possibility of a US recession.

“It’s a clearing event,” Dennis DeBusschere, president of 22V Research, told Yahoo Finance following the decision. “You didn’t get a Fed that was going to accelerate the downside in markets.”

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

One big reason stemmed from the Fed’s “base case” that tariff-induced inflation will be “transitory” and have a short-term “one-off” effect on price growth. This was reflected in the central bank’s projections, which forecast year-end PCE inflation rising to 2.7% before reaching its 2% target by 2027 — “a relief to investors” who had been bracing for stickier prices, according to DeBusschere.

But some experts warn that “transitory” inflation remains an unrealistic expectation — and that the projections for two rate cuts this year could unravel as the Trump administration continues to flip-flop on trade policy. Powell himself said “there is a level of inertia” to stay consistent with prior forecasts until greater clarity emerges.

“Uncertainty was a highlight of the statement,” Rick Rieder, chief investment officer of global fixed income at BlackRock, wrote in response to Wednesday’s decision. “Like market participants, the Fed is at a highly uncertain point, and it is in need of time and data to determine the next course of action.”

Both consumer and producer inflation showed a deceleration in price growth over the month of February. But details under the surface pointed to a potential stalling out in reaching the Fed’s 2% target, with tariffs serving as the greatest threat to Powell’s “transitionary” base case.

There are also concerns the Fed may cut rates because of a weakening labor market and slowing economic growth — a move that wouldn’t be cheered by investors.

“Everybody wants two cuts, three cuts, four cuts. You don’t want any cuts. You want earnings growth. You want a strong economy,” Ken Mahoney, CEO of Mahoney Asset Management, told Yahoo Finance on Thursday. “Be careful what you wish for.”

Despite a slightly more hawkish tilt from the central bank, with more FOMC members forecasting interest rates to either hold steady or come down by just 0.25% instead of the consensus 0.50%, traders still boosted their own expectations of where interest rates could end the year.

According to the latest data from Bloomberg, markets are now pricing in three cuts instead of two. But Ross Mayfield, investment strategist at Baird, pushed back on reading too far into the projections.

“The ‘dot plot’ and [the Fed’s] projections have not been super reliable over the last five years,” Mayfield said, stressing that the uncertainties within the current economic and political environment add another layer of confusion when it comes to future policy.

“When the path forward is so unclear, you just take it with a grain of salt, go back to basics, and focus on the drivers of either the individual equities or the sectors in the market that you own,” he said. “In this case, thinking about things like earnings and long rates, rather than what the Fed is doing at the short end of the curve.”

Following the Fed’s decision on Wednesday, markets experienced what Mayfield described as a “relief rally,” citing the lack of downside surprises in the forecasts. But the move higher was short-lived, with all three major indexes slipping into the red the following trading session.

Still, the S&P 500 and Dow were able to eke out gains over the five-day period, while the tech-heavy Nasdaq, which has struggled as its “Magnificent Seven” leaders fail to deliver outsized returns, ultimately fell short.

“If you’re going to really climb your way out of this hole, you need either clarity on the tariffs, which, who knows? Or you need some other sort of nice catalyst,” Mayfield said. “That could come in the form of next earnings season, or maybe it’s a really strong jobs report that comes out of nowhere.”

“For now, we’re kind of bouncing around and Powell’s presser just wasn’t enough to give the market the juice it needed to really get over the hump.”

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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