Fed chairs are tough on policy in their final year, and Powell is no different, DataTrek's Colas says

According to DataTrek Research, Fed Chair Jerome Powell is unlikely to signal imminent rate cuts, mirroring the hawkish stance of his predecessors in their final year, as he prioritizes his inflation-fighting legacy and the Fed's political independence. Despite cooling inflation and economic growth data, market expectations for rate cuts have decreased, with traders now pricing in only two quarter-point cuts by the end of 2025. Historically, the S&P 500 has rallied an average of 16% during the last 12 months of the previous three Fed chairs' terms, suggesting a hawkish Fed isn't necessarily detrimental to the stock market.

Analysis

Federal Reserve Chair Jerome Powell is anticipated to maintain a hawkish stance at the upcoming policy meeting, refraining from signaling imminent rate cuts. This approach aligns with historical precedent, as observed by DataTrek Research, where the last three Fed Chairs—Alan Greenspan, Ben Bernanke, and Janet Yellen—concluded their terms with a conservative monetary policy, focused on preserving their inflation-fighting credibility and the central bank's political independence. Powell, whose term expires in May, appears to be following this pattern. Consequently, market expectations, reflected in fed funds futures pricing via the CME FedWatch tool, have adjusted to foresee only two quarter-point rate cuts by the end of 2025, with odds for just one cut this year increasing despite recent data indicating cooling inflation and economic growth. Uncertainty surrounding potential tariff policies from the Trump administration further supports a cautious Fed approach. Notably, historical data suggests this hawkish positioning may not be detrimental to equity markets; the S&P 500 has recorded an average rally of 16% during the final 12 months of the previous three Fed Chairs' tenures, implying investors often factor in these legacy considerations.

Key Decisions for Investors

• Investors should anticipate a continued hawkish stance from the Federal Reserve, potentially delaying rate cuts further into 2025, and adjust interest rate sensitivity within portfolios accordingly.
• Consider that historical market performance during the final year of past Fed Chairs' terms has been positive for equities, suggesting that a hawkish Fed focused on its legacy may not necessarily preclude further market gains.
• Monitor Fed communications and policy decisions through the lens of Chairman Powell's focus on his inflation-fighting legacy and the Fed's political independence, rather than solely on short-term economic data points or political pressure.
• Factor in heightened uncertainty from potential fiscal policies, such as tariffs, which could influence the Fed's rate path and introduce market volatility.