Fed's View of What We Don't Know Determines the Stock Market's Path

Investors and traders hoping for clarity on where the U.S. economy, stock market, or interest rates are headed in the second half of 2025 are facing an uphill battle. There’s no clear path forward, only a cloud of uncertainty — a point even the Federal Reserve openly acknowledges.

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At the Fed’s most recent policy meeting, Chair Jerome Powell emphasized that unpredictability is the dominant theme. He used variations of the word “uncertain” nearly 20 times during his post-meeting press conference, signaling just how murky the outlook has become.

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Investors had hoped for guidance on a range of escalating global issues, from renewed Middle East tensions to growing trade friction with China. Instead, they got a consistent message: the Fed doesn’t yet know what lies ahead.

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Rather than take decisive action, the Fed has adopted a wait-and-see approach. Powell explained that the central bank must continue gathering data before deciding whether it's safe to begin cutting interest rates. That cautious posture underscores how difficult it is for investors to position themselves.

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“As an investor, you just can’t trade this — it’s impossible to stay ahead of it,” said Scott Ladner, chief investment officer at Horizon Investments. “The Fed’s read-and-react stance only confirms how little anyone knows right now.”

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Despite all the uncertainty, the stock market remains oddly calm on the surface. The S&P 500 is currently within 3% of its record high, but price movements have been unusually tight. So far in June, only two trading sessions have seen moves greater than 1%. Over the past two weeks, the index has barely budged — even as oil prices have soared and the U.S. dollar has weakened significantly amid rising geopolitical concerns.

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Much of this market stagnation can be blamed on headline-driven swings in sentiment. Traders are reacting not to long-term fundamentals but to the latest news alerts. This was evident last week, when markets shifted direction multiple times in response to global developments.

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On Thursday, U.S. stock futures dropped more than 1% following reports that American officials were preparing for potential strikes on Iran. But when former President Donald Trump indicated a preference for diplomacy, futures recovered quickly.

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The next day, Fed Governor Christopher Waller suggested that rate cuts could begin as early as July, sparking a short-lived rally in S&P futures. However, those gains evaporated quickly after reports of missile exchanges between Iran and Israel, followed by news that the U.S. plans to crack down on Chinese semiconductor facilities. Ultimately, the index closed 0.2% lower on the day.

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“We’re stuck in the middle because of opposing forces,” Ladner said. “That’s why the S&P 500 can’t break decisively in either direction.”

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Fed policymakers, for now, have left interest rates unchanged. Most officials still anticipate two quarter-point rate cuts before the end of the year — but those projections are far from certain. With inflation trends still unclear and the labor market facing potential stress, no one is making firm bets.

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“None of us have high conviction in these forecasts,” Powell said. “We expect meaningful inflation in the coming months, and that needs to be factored into our decisions.”

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Wall Street is adjusting accordingly. According to data from Deutsche Bank, discretionary investors have shifted from slightly underweight equities to a more pronounced underweight position. Overall equity exposure has dropped into the lower half of its historical range, indicating broader caution.

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Investor expectations for rate cuts remain scattered. Swaps markets currently assign about a 62% chance the Fed will ease policy by September — but these positions aren’t backed by strong conviction.

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Economic forecasts among major banks are just as mixed. JPMorgan sees a single rate cut happening in December. UBS expects a full percentage point of cuts starting in September but warns the risks lean toward a delayed start. Bank of America, meanwhile, doesn’t expect any cuts at all in 2025.

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According to Bill Sterling, global strategist at GW&K Investment Management, the Fed is in unfamiliar territory. “We haven’t seen tariffs of this magnitude in modern times,” he said. “There’s no established playbook to follow.”

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The S&P 500 is up 1.5% so far this year, largely due to a sharp rebound from an April downturn triggered by Trump’s new global tariffs. The index surged 19% between April 8 and the end of May after the administration paused some of the levies. But since then, market momentum has fizzled as investors react to one headline after another.

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Sterling cautions long-term investors against making emotional portfolio shifts based on daily news. The same themes that drove massive gains in 2023 and 2024 — such as advances in artificial intelligence, solid corporate earnings, and resilient consumer demand — are still in place. Yet, those tailwinds are being offset by mounting concerns over policy, geopolitics, slowing economic growth, and early signs of consumer strain.

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Economic data has been sending mixed signals. The Fed downgraded its growth forecast while increasing projections for inflation and unemployment. Meanwhile, May’s economic indicators show early signs of cooling. U.S. manufacturing activity has contracted for three straight months. Industrial production fell again in May. Imports dropped to their lowest level in 16 years. Job growth has slowed, and retail sales saw their biggest monthly drop of the year.

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Yet, inflation — as measured by the Consumer Price Index — came in softer than expected for the fourth straight month, suggesting tariffs have not yet made their full impact. That could change quickly if rising import costs begin feeding through to consumer prices.

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All of this adds up to a challenging environment for investors trying to navigate the rest of the year. “The Fed has made its framework clear,” said Kevin Brocks of 22V Research. “But now it’s a matter of watching how the economy and inflation respond to these tariffs — only then will markets get real direction.”

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