The stock market has fallen fast over the past month. Business and consumer sentiment is souring, and investors are afraid that economic data will soon start to show deeper cracks.
The question on Wednesday: Will the Federal Reserve also express concern about the path ahead?
So far, Fed officials have largely avoided commenting on an uncertain outlook while current economic data remain solid. A healthy labor market has allowed the central bank to continue to point to economic resilience as it holds interest rates high in response to stubborn inflation.
But in addition to announcing its decision on interest rates at its monthly meeting on Wednesday, the Fed will publish its first economic projections since December.
“Since then, the U.S. economic environment has changed dramatically,” said Matt Colyar, an economist at Moody’s Analytics.
Trump administration officials have largely brushed off investors’ concerns, saying that the economy remains on sound footing and that a modest pullback from recent stock market highs is nothing to worry about. The S&P 500 briefly entered a correction last week after four straight weeks of losses. The index is 8.6 percent lower than its record high last month, and down more than 4 percent so far this year.
Treasury Secretary Scott Bessent recently suggested that earlier proposals by the government to introduce hard-line tariffs on trading partners were likely to be softened as negotiations progressed, and that this could offer a tailwind for the stock market.
Investors are squarely focused on whether the economy can withstand the current period of fading growth expectations and rising recession worries, at least until more business-friendly policies like tax cuts and deregulation are settled on and there is more certainty around tariffs.
At the beginning of March, investors expected the Fed to next cut interest rates in June, based on prices in interest rate futures markets. As of Tuesday, those expectations had been pushed back six weeks to July.
But certain interest rates have started to come down even without Fed action. As growth worries have mounted, longer-dated market interest rates have fallen, making things like mortgages and auto loans cheaper.
In effect, this decline is doing some of the same job that the Fed’s cutting interest rates would do and is buying the central bank some time while inflation remains sticky.
Lower interest rates are typically seen as being beneficial for the stock market, but the recent decline in rates has not helped lift companies’ share prices
When rates fall because of fundamental concerns about the economy, the forecast for the companies in the stock market is also gloomy and their valuations typically fall.
The clouds have been gathering over corporate America. Chief executives from businesses like Delta Air Lines, Dollar General and Macy’s are warning that consumers have begun to struggle.
And retail sales in February were lower than expected, with January’s preliminary figure revised down in the latest data.
The Federal Reserve Bank of Atlanta’s growth forecast for the first quarter is currently minus 2.4 percent.
The U.S. dollar is 4 percent lower just in March, on course for its worst month since November 2022. As the dollar weakens, the impact of President Trump’s tariffs on domestic companies and consumers intensifies. Investors have sought out the safety of gold, which rose past $3,000 per troy ounce this week for the first time.
Foreign investors have already begun to pivot away from U.S. markets. Analysts at Bank of America said their latest global survey of fund managers showed a sharp drop in the rosy expectations that they had started the year with, but not yet to the point that they were expecting a recession, even though worries over a possible downturn had risen. Analysts labeled the current sentiment a “bull crash.”
Should the Fed signal on Wednesday that it is becoming more concerned about the economy and that the “dot plot” of interest rate forecasts suggests a cut sooner than investors expect, the stock market could fall even further.
Futures on the S&P 500, which give investors the ability to trade before exchanges officially open, pointed to a modest rise on Wednesday, paring some of its 1 percent slide on Tuesday.
“The Fed seems committed to sitting on its hands for the time being, but the dot plot will force them to ‘guesstimate’ whether they’ll cut rates this year and by how much,” said Kristina Hooper, chief market strategist at Invesco. “With so much up in the air, it’ll be interesting to see their expectations.”
Mr. Colyar at Moody’s is among those who expect the Fed to hold interest rates steady until the second half of the year, when he expects the mounting tariff war to have slowed growth to the point that the central bank takes action.
“The timing for those moves will inch closer if the economy starts flashing red,” he added.