It all makes the calculus different for the Federal Reserve, which is beginning its latest meeting on interest-rate policy and will make its announcement on Wednesday.
The Fed could lower its main interest rate, which would make it easier for US businesses and households to borrow. That in turn could boost the economy. But lower interest rates can also push inflation upward, and US consumers have already begun bracing for higher inflation because of tariffs.
Virtually everyone on Wall Street expects the Fed to hold its main interest rate steady on Wednesday, as it waits for clues about how the uncertainty will play out. The job market, for the moment at least, appears relatively stable after the economy closed last year running at a solid rate.
More attention will be on the forecasts the Fed will publish after the meeting, showing where officials expect interest rates, inflation and the economy to head in upcoming years. For now, traders on Wall Street are largely expecting the Fed to deliver two or three cuts to rates through the end of this year.
One of the reasons the US stock market’s sell-off in recent weeks has “so far been orderly,” with the epicentre remaining within tech, may be because of faith that the Fed can protect Wall Street, according to strategists at Barclays. If conditions were to deteriorate quickly, the Fed could cut rates to support the economy.
Such faith “crucially could be put to test this week” if the Fed appears to be more concerned about inflation than a weakening economy, at least relative to the market’s expectations, according to the Barclays strategists led by Venu Krishna.
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In stock markets abroad, indexes rose across much of Europe and Asia. They have broadly been doing better than the US stock market this year, flipping a years-long trend and forcing questions about whether the end has arrived for what was called “US exceptionalism.”
Japan’s Nikkei 225 rose 1.2 per cent. Investors expect the Bank of Japan to keep its benchmark interest rate unchanged at a monetary policy board meeting due to wrap up Wednesday.
Trading on Indonesia’s stock exchange was suspended temporarily as the benchmark JSX tumbled as much as 6 per cent. But it later pared the loss to 3.8 per cent.
Investors have been sending shares of state-owned banks lower after the government launched a sovereign wealth fund, called Danantara, that so far has not proven popular. Worries over US tariffs and other risks have also shaken confidence in the economy of the world’s fourth-most populous nation, said Budi Frensidy, a professor at the University of Indonesia.
In the bond market, the yield on the 10-year US Treasury note edged down to 4.28 per cent from 4.31 per cent late on Monday.
AP
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