Fed's Hawkish Tone Stirs Placid Market — WSJ

By Matt Wirz and Katy BarnatoThe Federal Reserve kept interest rates on hold Wednesday afternoon but Chair Jerome Powell and other members of the central bank struck a more hawkish tone than some investors expected, causing markets to wobble.Stock and bond prices were rising steadily until the midafternoon release from the Fed's open market committee shook confidence that the central bank would cut rates twice later this year. Powell further dampened animal spirits with a warning about inflation in his public comments."We expect a meaningful amount of inflation to arrive in the coming months," Powell said. "We have to take that into account."The Dow Jones Industrial Average ultimately finished the day 0.1% lower while the Nasdaq Composite rose 0.1% and the S&P 500 was close to flat. The yield of the 10-Year Treasury finished at 4.397%, up from 4.390% Tuesday.Most Fed members still expect to cut rates twice in 2025, but their majority is growing tenuous. Seven of the 19 Fed bank presidents and governors now expect no rate cuts at all this year, up from four in March."The statement didn't have a lot of changes but you have to read between the lines," said Kathy Jones, head of fixed-income strategy at Charles Schwab. "Despite expectations for slower growth and lifting unemployment, the Fed sees inflation going up so they are not going to cut very soon."The Fed forecasts that inflation will rise above 3% by one measure in the coming year, the Fed's economic projections show.Powell spoke about Wednesday's policy decision and the economic outlook, saying the Fed remains well positioned to respond to any need for interest-rate changes. He said the labor market is in balance and not the source of inflationary pressure, but added that the Fed prefers to hold rates steady for now rather than cutting given uncertainty around the impact of tariffs on prices.Fed policymakers are navigating a complex environment. President Trump renewed his calls for an interest-rate cut on Wednesday morning, calling Powell "a stupid person."Trump has complained repeatedly that rates should be lower, but Powell has stressed that the central bank is closely watching the data for signs of weakness that have yet to arrive. Short-term measures of expected inflation have risen but long-term measures remain largely stable, Powell said Wednesday.Higher energy prices from the conflict in the Middle East come as economists worry that Trump's tariffs could spur inflation. Thus far, inflation data has defied fears, with the consumer-price index showing muted rises in May.While most stocks struggled to find direction Wednesday, companies tied to cryptocurrency surged on the Senate's passage of legislation Tuesday regulating stablecoins, a type of digital money. Cryptocurrency exchange Coinbase Global was the biggest gainer on the S&P 500, rising 16%.Traders largely shrugged off intensifying geopolitical pressures. Rising tensions in the Middle East have fueled concerns of disruption in the Strait of Hormuz, through which roughly one-fifth of the world's petroleum is ferried.Meanwhile, Trump is considering a potential strike on Iran. Hopes for a quick resolution to the Israel-Iran conflict have dimmed, and the U.S. has expanded its military footprint in the region. Trump has called for Iran's unconditional surrender and said he won't target the country's leader "for now."A July 9 deadline for a slate of higher tariffs looms for some of the U.S.'s closest trading partners, after Trump left this week's G-7 summit with no new trade agreements. In recent trading:Major stock indexes ended the day mixed. U.S. markets will be shut for Juneteenth on Thursday. Brent crude-oil prices gained 0.3% settling at their highest since February. Treasury yields edged higher, while the WSJ Dollar Index was close to flat. Bitcoin prices edged down 0.9% below $104,000. The Senate passed the Genius Act, a bill to regulate stablecoins, in a win for the cryptocurrency industry. Write to Matt Wirz at [email protected]