The way he said it was not dramatic at all. For what most people in the room believed to be his last press conference as Fed Chair, Jerome Powell took the podium and told reporters that the economic outlook was extremely uncertain in that flat, purposefully unenthusiastic cadence he has used through banking scares, election years, and at least one ugly attempt by a sitting president to push him out. Three phrases. He’s already used them. Most of the time, the market chose not to pay attention as it worked to recover from a 9% decline and reach new all-time highs.
It’s difficult to ignore how frequently this occurs. Powell speaks with the cautious flatness of a man who has long since concluded that the emotion in his voice poses a greater threat than the content of his words. In the days that followed, the S&P 500 gradually increased after the warning was delivered in a quiet, almost courteous manner. There’s a feeling that traders heard the words but saw them through the prism of their preexisting beliefs—that rate cuts will occur on time and that the Iran issue will be resolved before summer.
By December, futures markets had priced in a minimum of two cuts, the first of which had occurred by April. That hasn’t occurred. Now that the FOMC has maintained the benchmark rate for three meetings in a row, what initially appeared to be patience is beginning to feel more like a subtle change in stance. The economists at JPMorgan have already revised their prediction, which calls for no cuts in 2026 and a potential shift toward increases by the third quarter of 2027. Back in January, no one had that scenario in their year-end notes.
Naturally, sitting at the gas pump is the cause. Due in large part to Iran and the wider instability spreading throughout the region, oil has been trading above $100 per barrel for weeks. The Cleveland Fed’s nowcast tool now projects an April CPI of about 3.6% after the March CPI surged 90 basis points to 3.3%, the lowest single-month reading in almost two years. The central bank will find it challenging to maintain that it is still on a glide path back to 2% if that figure holds. When Powell approached the microphone, he was aware of this. In a matter of hours, the bond market figured it out, and yields began to rise.
The disconnect is what gives the moment its peculiar quality. At 20.9 times forward earnings, the S&P 500 is trading well above the five-year average of 19.9 times. Only if you think rate cuts will continue to support those discounted future cash flows will that premium make sense. When the cuts are removed from the equation, the math becomes self-evident. The same earnings begin to appear less valuable in today’s dollars as discount rates increase and multiples compress. Rarely does this type of repricing occur in a single session. It is not required to. It just needs to start.
Powell’s tone carried a hint of reluctance that he was unable to fully conceal. He did not anticipate a recession. He was not referring to a correction. However, investors should probably take it more seriously than the index closes indicate when the head of the Federal Reserve says the situation is unclear, oil is above $100, and inflation is going in the wrong direction. As you watch this play out, it seems like the market is placing a wager on a geopolitical result that no one in Washington is willing to genuinely support.
Although they aren’t perfect, these historical parallels do exist. It turned out that Alan Greenspan’s 1996 statement about “irrational exuberance” was both directionally correct and several years too early. It wasn’t until 2000 that dot-com reached its peak. Comments on central bank valuations have a long history of being accurate regarding the destination but untrustworthy regarding the timing. Powell’s comment fits that description. beneficial for risk awareness. Weak as a signal for trading. In three months, investors who view it as a sell trigger will likely feel foolish. Those who completely disregard it might experience worse things in the future.
The bulls will appear prophetic and the warning will seem like background noise if oil cools and tensions subside. In retrospect, the softly spoken sentence from last week will sound very different if they don’t. As of right now, the S&P 500 and the departing Fed Chair have given the room two distinct accounts. There is only going to be one correct answer.
