Fed's Uncertainty Leaves Investors in Limbo Amid Geopolitical Tensions

The Federal Reserve's latest meeting left investors in a state of uncertainty, with Chair Jerome Powell using the word "uncertain" nearly 20 times during his post-meeting news conference. This uncertainty stems from a variety of factors, including higher Middle East tensions and renewed U.S.-China trade friction. Investors had hoped for clear guidance on when the central bank might begin cutting rates, but instead, they were reminded that the Fed needs more evidence before feeling safe trimming its benchmark rate.

Scott Ladner, chief investment officer at Horizon Investments, captured the mood of the market, stating that the Fed's read-and-react stance showed just how clueless everyone is right now. He noted that as an investor, it is impossible to trade this uncertainty or get ahead of it. The S&P 500, which is less than 3% below its record high, has barely moved all month, with only two days showing moves of more than 1%. Despite a sharp rise in oil prices and a weaker dollar, the index has barely shifted over the past two weeks.

Conflicting headlines have left traders stuck in limbo. On Thursday, a U.S. market holiday, S&P futures fell more than 1% in early trading after reports that officials were preparing for a possible strike on Iran. When Donald Trump said he preferred diplomacy, the slide paused. Then on Friday morning, Fed Governor Christopher Waller suggested rate cuts could begin as early as July, sending futures higher as the regular session opened. Those gains faded, however, after missile exchanges between Iran and Israel and updates that the Trump administration planned restrictions on Chinese semiconductor plants. At market close, the index was down 0.2%.

Fed officials held rates steady this week, with most voting members expecting two quarter-point cuts this year. However, these projections are just educated guesses, as inflation may be higher than expected, and it’s unclear how strong the job market will be with rising global risks. Powell acknowledged that no one holds these rate paths with a lot of conviction, stating that the Fed expects a meaningful amount of inflation in the coming months and must take that into account.

Investors are positioning accordingly. Deutsche Bank strategists report that overall equity positioning has slipped this week, with discretionary managers moving from slightly below neutral to noticeably underweight. Now, stock bets are in the lower-middle of their usual range. The Fed too is facing an uncharted territory, as modern history offers no easy model for the current level of tariff hikes between major economies. Long-term investors will be wise not to make abrupt shifts in portfolio allocations due to news headlines.

The factors that fueled 20% gains in 2023 and 2024, including AI excitement, strong earnings, and a solid consumer, are still in place. However, worries about policy, geopolitics, slower growth, and consumer strain are keeping stocks from moving higher. In its new forecasts, the Fed cut its 2025 growth projection and raised its estimates for unemployment and inflation. Recent data indicated mixed signals, with U.S. factory activity shrinking in May for the third straight month. Industrial production fell again, imports dropped to a 16-year low, hiring cooled, and retail sales were the weakest since January.

Yet the May consumer price index rose less than economists expected for the fourth month running, suggesting tariffs have not yet pushed up consumer prices. All of which leaves traders facing a steep challenge as they try to prepare for the second half of 2025. The Fed has laid out its reaction function, but investors will have to wait and see what the impact of tariffs on inflation actually is.