At the start of the two-day Federal Reserve meeting, investors have accepted the fact that the Fed may not cut rates this time. However, as the stock market is at a fragile point, they are looking for any signals from Fed Chair Powell regarding the direction of inflation.

"Powell's tone on inflation is crucial for Wall Street, as traders need to hear that price pressures are continuing to ease," said John Belton, portfolio manager at Gabelli Funds. "There are clearly potential black swans."

The S&P 500 recorded its worst performance in 10 trading days on Monday, following discussions sparked by the Chinese AI startup DeepSeek, raising questions about America's dominance in the AI field and the high valuations of major tech giants like Nvidia. Meanwhile, the Fed is struggling to cope with the new Trump administration, which has been accompanied by a series of executive orders and has begun to fulfill its promised crackdown on immigration, while the threat of imposing tariffs on American trade partners looms in the background.

"The unwinding of AI trades is something to pay attention to," said Jeff Buchbinder, chief equity strategist at LPL Financial. "Tariffs are an uncertainty factor."

In some respects, this Federal Reserve meeting is expected to be relatively calm for the stock market. Options traders are betting on slight fluctuations in the stock market, with the S&P 500 expected to fluctuate by 0.8% in either direction on Wednesday, lower than the average actual fluctuation of 1.1% on Fed meeting days over the past 18 months as compiled by Piper Sandler.

Swap contracts show that traders expect the Fed to pause rate cuts, but they are unsure how long the pause will last. This is why Powell's tone during the press conference after the rate decision on Wednesday afternoon is worth noting. If he shows caution and unwillingness to commit beyond any attitude, it would not be in line with his character, but Wall Street professionals will listen for any content in his wording or tone that indicates his thoughts.

"We will pay attention to how Powell balances acknowledging more supportive economic data against ongoing policy uncertainty," said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. His firm is positioning for a market rotation outside of tech, slightly overweighting consumer staples, energy, and industrial stocks.

Traders are beginning to doubt whether the implied volatility during Powell's speech will be higher after the Cboe Volatility Index briefly spiked above 20 on Monday. A level of 20 typically indicates that the stock market is under pressure.

Wall Street's main fear gauge closed at 17.90 on Monday, the highest level since the Fed's last meeting ended on December 18 of last year. At that time, Powell warned that officials needed to maintain a restrictive monetary policy to combat inflation. The S&P 500 subsequently fell about 3%, marking the largest intraday reversal in two years.

Investors still remember this vividly, especially with Trump back in power, pushing for large-scale import tariffs and extensive expulsions of low-wage undocumented workers, economic plans expected to spur inflation and potentially harm growth.

"We believe the Fed will pause rate cuts for a while," said Matt Lloyd, chief investment strategist at Advisors Asset Management. In response, his firm favors financials, industrials, real estate, and some healthcare and utility companies closely tied to a strong economy.

The stock market has been experiencing greater volatility around the release of economic data and events. Data from Asym 500 shows that in the past three months, on days of Fed rate decisions, consumer price reports, or government monthly employment data releases, the average actual volatility of the S&P 500 was 22%, double that of other trading days at 11%.

However, some Wall Street professionals do not expect to receive much clear information from the Fed Chair.

"We are not betting heavily on a change in Fed policy," Belton of Gabelli said, expressing optimism about U.S. stocks related to AI growth. "We are unlikely to get any advance commitment on the timing of future rate cuts from Powell."

Another positioning challenge is the number of additional catalysts surrounding the Fed's decision and Powell's press conference. In particular, several major U.S. companies are about to announce their earnings; Microsoft, Meta, and Tesla will release their earnings on Wednesday local time, while Apple will announce its earnings the following day.

Sevasti Balafas, CEO of GoalVest Advisory, said that ultimately, there are too many unknowns, from the Fed's interest rate path to profit growth, to how White House policies are implemented and affect American businesses. This leaves investors with only one familiar strategy.

"Don’t fight the Fed," Balafas said. "If inflation stays high and rates remain elevated, that will negatively impact stocks, although if companies investing heavily in AI continue to see positive effects on their profits, the market will keep rising."

Article reposted from: Jin Shi Data