Market Stories by Fathom 08/05/2025

As expected, the Fed left interest rates unchanged at 4.25-4.50%. The main takeaway is that there’s a lot more uncertainty now — both inflation and unemployment risks have gone up. Powell admitted Trump’s tariffs turned out bigger than anyone thought, and while talks are ongoing, it’s anyone’s guess how they’ll pan out. For now, the Fed is basically sitting tight, waiting to see how things unfold, and ready to react if needed.

Powell laid out the four big policy areas messing with the Fed’s job: tariffs (the main headache), immigration, fiscal policy, and regulations. The tariffs, in particular, are tricky because no one knows how big the hit will be or how long it’ll last. It’s a supply shock, and that’s not something the Fed handles easily. So they’re watching jobs and inflation closely and will adjust when they see clear data.

So far, despite all the talk, the hard numbers haven’t shown much damage yet — inflation’s flat, the job market’s steady, and consumer spending (minus stuff like government spending and trade) is still strong. Powell made it clear that they’ll only act when actual data shifts, not just on speculation. He hinted that, with the tariffs as they are, the Fed might be in a holding pattern for the next year. But they’re not too worried about waiting things out for now. Markets are betting there’s a slim chance (20%) of a rate cut in June and a bigger shot (80%) by July. If the job market starts cracking, the Fed could go bigger with a 50bps cut to help cushion the blow — but nobody knows exactly when or if that moment will come.

Meanwhile, despite all the tariff drama, markets bounced back strong from their April drop. Solid corporate earnings and hope that Trump or the Fed will step in if markets tank again have boosted investor confidence. But there are still real worries: slowing GDP, weakening manufacturing, rising debt, and signs of strain in the labor market and consumer sentiment.

Even with these red flags, stock prices have rebounded to near highs — maybe too high given shaky earnings forecasts. That sets up the risk of investors getting caught off guard. Moreover, fund flows show that bidding up of risky assets was mostly retail driven whereas institutional positioning is mostly negative.

Bottom line: Stay cool. Stick to a diversified portfolio — mix it up by asset class, sector, and geography. If you’re in it for the long haul, look at adding to U.S. stocks when the S&P 500 is in the 5,100–5,500 range (assuming no recession). Equal-weight strategies or picking individual quality stocks might be smarter than just riding the index. And for fixed income, bonds in the 3-to-7-year range look decent too.

Alexandros Tavlaridis