(March 20): Stocks climbed and bond yields fell as Jerome Powell calmed tariff-obsessed investors, signaling the Federal Reserve saw no need for drastic action in the face of Donald Trump’s trade war.

After central bankers held monetary policy steady, as expected, Powell was measured in his assessment of how the president’s actions might shape the economy, citing the potential for the impact of tariffs on inflation to be “transitory.” The jump in stocks, the biggest for any Fed day since July, follows a bruising four-week stretch in which the S&P 500 slid into a correction. Treasuries saw an abrupt reversal, with two-year yields sinking below 4%.

“Start making T-shirts: ‘Transitory: We are so back!’” said Christian Hoffmann at Thornburg Investment Management. “The market will read this as dovish at the margin, with the Fed not overtly concerned with the economy or inflation. Stocks and bonds rejoice.”

After an epic bout of cross-asset volatility, Powell threaded the needle. His calibrated tone on recession risk – stating it was “not high” – soothed nerves among stock investors. Meantime, the central bank’s move to trim growth assessments gave fuel to the bond rally, with traders and the Fed now aligned on the rate-cut outlook this year.

“Powell came in and gave a pretty dovish performance in the sense of, ‘We got this, we’re in a good place, we can afford to wait, we’ll see how it goes, we’re gonna get the job done’,” said Bill Dudley, the former president of the New York Fed, on Bloomberg Television. “He was pretty reassuring to people that this was all quite manageable.”

The Fed will also start shrinking its balance sheet at a slower pace starting in April, reducing the amount of bond holdings it lets roll off every month.

“The Fed indirectly cut rates today by taking action to reduce the pace of runoff of its Treasury holdings,” said Jamie Cox at Harris Financial Group. “This paves the way for the Fed to eliminate runoff by summer, and, with any luck, inflation data will be in place where reducing the Federal Funds rate will be the obvious choice.”

The S&P 500 rose 1.1%. The Nasdaq 100 gained 1.3%. The Dow Jones Industrial Average added 0.9%. Megacaps like Nvidia Corp and Tesla Inc led market gains. Boeing Co jumped after saying cash outflows are likely to be smaller than forecast this quarter.

The yield on 10-year Treasuries declined four basis points to 4.24%. The dollar pared its advance to 0.2%.

Stocks rallied despite changes to Fed forecasts that could be viewed as bearish for equities, among them a tamping down of growth expectations in 2025 and a higher estimate of inflation.

That’s because the correction in stocks already accounted for a significantly worse economic backdrop than existed when the Fed last met, according to Amanda Lynam at BlackRock.

“A lot of that was baked in,” Lynam said on Bloomberg Television. “We’ve had such a bruising few weeks in the equity market. Most forecasters have reflected lower growth and higher inflation, and that’s part of what’s driving us here.”

Heading into the Fed meeting, money managers pared risk en masse and now have scope to re-build their equity positions from the lows. The latest Bank of America Corp survey showed investors cut holdings of US equities at the fastest pace on record in the grip of the tariff-spurred turmoil hitting world markets.

“They changed the language enough and the dots enough that a market, that was possibly looking for a hawkish Fed, felt the need to buy stocks and bonds,” said Peter Tchir of Academy Securities.

To Bret Kenwell at eToro, while many observers are focused on the word “transitory” from today’s Fed commentary — triggering flashbacks to 2021 when rampant inflation ultimately forced the Fed to aggressively raise rates — perhaps the word of the day should be “uncertainty.”

“Investors may be wondering why the Fed is forecasting two rate cuts in 2025 if they believe inflation will be higher this year than they did three months ago,” Kenwell said. “Despite Powell arguing that the economy is strong overall, the Fed reduced its GDP growth expectations for 2025 too, allowing them to leave rate-cut expectations unchanged for the time being.”

While stocks are rebounding from a clearly oversold condition, Kenwell says investors should keep an eye on bonds.

“If Treasury yields continue to move lower, we could see a further rally in dividend stocks, utilities and other yield-sensitive assets,” he noted. “Further, if tech can continue to rebound — even if it’s just a short-term bounce — it could fuel a larger overall rebound in US stocks given the disproportionately large decline we’ve seen in this group.”

To Mark Hackett at Nationwide, the market reaction was interesting in the face of the adjustments in the Summary of Economic Projections.

“The ‘bad news is good news’ reaction suggests that investors believe the SEP is less of a crystal ball than a reflection of the current level of uncertainty, with incrementally dovish leanings,” Hackett noted. “It is also an indication that the universal pessimism of the past month is waning, though a sustained recovery will require improved clarity on tariffs and growth.”

At Citigroup, Stuart Kaiser said the market reaction suggests those Fed updates were both largely expected and fully discounted by the recent selloff.

“We are surprised if that is the case, but can’t argue with the price action,” he said.

Kaiser also noted that the S&P 500 lost a bit of momentum into the close.

“That suggests the fundamental aspects of the event are less favorable absent positioning dynamics that pushed the market higher intraday,” Kaiser said. “However, today’s trading did offer further evidence that position de-risking is in the later innings and also that growth risks are persistent.”

Kaiser remains cautious on risk markets given growth, policy, budget and tariff risks — although risk/reward has mproved during the past week.

Some of the main moves in markets:

Uploaded by Jason Ng