Federal Reserve’s Stance on Interest Rates

On Wednesday, U.S. stock markets experienced modest gains following the Federal Reserve’s decision to keep its primary interest rate unchanged, a move anticipated by analysts. However, the Federal Reserve also cautioned about potential risks impacting the U.S. economy.

Market Performance Overview

The Standard & Poor’s 500 index increased by 0.4%, reversing a two-day decline and breaking a streak of nine consecutive days of gains. The Dow Jones Industrial Average rose by 0.7%, while the Nasdaq Composite saw a smaller increase of 0.3%.

Impact of Trade Negotiations

Throughout the day, market indices fluctuated significantly, peaking with the Dow gaining up to 400 points, buoyed by optimism surrounding potential trade discussions between the U.S. and China. These two economic powerhouses have been embroiled in a trade conflict, characterized by escalating tariffs that threaten a broader economic slowdown.

Uncertainty Surrounding Tariff Negotiations

Recent announcements of high-level talks set to take place in Switzerland this weekend initially lifted market spirits. However, subsequent comments from President Trump clarified that he would not lower the 145% tariffs currently in place on Chinese imports as a precondition for such negotiations. China, in turn, has indicated that any reduction in tariffs must precede discussions.

The Federal Reserve’s Cautious Outlook

Fed Chair Jerome H. Powell remarked that despite current economic performance being solid, the Fed remains vigilant of rising risks associated with tariffs. The bank’s stance allows it to hold off on altering interest rates, notwithstanding calls from Trump for more aggressive cuts to invigorate the economy.

“There’s so much that we don’t know,” Powell stated, echoing the sentiments of uncertainty echoed throughout Wall Street regarding the ongoing trade war.

Potential Economic Consequences

Powell further underscored the possible adverse effects of sustained high tariffs, such as increased inflation, slower economic growth, and rising unemployment. He warned that the scenario could lead to ‘stagflation,’ a situation in which the economy stagnates while inflation persists. This would pose challenges for the Fed in terms of monetary policy.

Corporate Responses and Market Reactions

Amid this fluctuating economic landscape, several large U.S. corporations reported stronger-than-expected profits at the beginning of 2025. Notably, Walt Disney Co. shares surged by 10.8% after exceeding profit expectations and announcing a growth in streaming subscribers.

Conversely, other firms like Chipmaker Marvell Technology saw an 8% decline in stock value following the postponement of its investor day due to economic uncertainties.

Bond Market Activity

In the bond market, yields on Treasury notes reflected the Fed’s decision, with the 10-year Treasury yield dropping to 4.27%, down from 4.30% the previous day.

Global Market Impact

While European markets generally declined, Asian markets showed modest gains, with Hong Kong rising by 0.1% and Shanghai by 0.8%. This uplift came on the heels of interest rate cuts announced by China, aiming to bolster its economy amid the challenges posed by increased tariffs.

Contributors: Troise and Choe, Associated Press