As investors fear that President Donald Trump’s policies could complicate the central bank’s efforts to control the last bout of inflation, delaying interest-rate cuts and becoming a barrier to the market’s bull run, the Federal Reserve’s first policy meeting of 2025 this week could put a dent in the stock market rally.
After Trump took the oath of office as the 47th president of the United States, U.S. equities on Friday concluded a successful week on Wall Street. The new $500 billion Stargate joint venture focusing on artificial intelligence infrastructure, which catapulted the S&P 500 SPX to its record territory for the first time in 2025, was one of the several early movements on energy, immigration, and cryptocurrency that investors had to process.
The absence of specific import tax pronouncements during this early phase of the new government, however, may be the biggest surprise. As a potential barrier to reducing inflation, tariffs were a major component of Trump’s campaign pledges that had already fueled post-election volatility in the financial markets.
Will Fed Chair Jerome Powell steal the show when he takes the podium on Wednesday to give his press conference and remind markets who is in charge, given that the financial markets are currently focused on the inflation and interest-rate outlook?
“Will Powell or Trump lead the market next week [this week]? According to Katie Nixon, executive vice president and chief investment officer for Northern Trust’s wealth management division, “I believe they will be highly correlated.” “It is obvious that Trump and the policies the president is implementing will have an impact on Powell. However, the market will pay attention to what Trump says in each speech, which might have a significant impact on market volatility.
At the end of its January meeting this week, the Federal Open Market Committee is expected to halt its monetary-easing cycle and maintain interest rates at their current range of 4.25% to 4.50%. Nixon told MarketWatch over the phone that policymakers believe the economy hasn’t “consistently made positive progress” on inflation, and that uncertainty surrounding Washington’s tariff policy is “the thumb on the scale” for the Fed to wait.
Indeed, recent Fed communications have confirmed that some policymakers believe Trump’s policies on immigration, tariffs, tax cuts, and deregulation pose upside risks to inflation. The new administration also wasted little time in attacking the Fed, with Trump declaring last week that he will exert pressure to lower interest rates in an effort to boost the American economy.
According to Marta Norton, chief investment strategist at Empower, “Powell has been very clear on maintaining the central bank’s independence, but it’s not all that unusual for a president to have strong views on interest rates and want his views reflected in Fed policy.”
“However, Trump can influence what the Fed does through fiscal policy, and if the fiscal policy proves inflationary, that’s going to be counterproductive to getting lower interest rates,” she stated.
The effect of Trump’s policies on company profits
Investors in the stock market are particularly curious about how Trump’s return to the White House would affect business profits, which are a key factor for corporate America and a determinant of stock market returns.
Although some of Trump’s plans, including tax cuts and deregulation, are expected to boost corporate profits, there are worries that they could also raise expectations for earnings and raise the bar even more for businesses to reach.
“Earnings and the company’s ability to deliver on high earnings expectations are critically important for the performance of the stock market this year, because expectations for earnings are quite high, so disappointment can move the stock market,” Norton told MarketWatch by phone on Thursday.
As a result of the Fed’s higher-for-longer interest-rate policy, rising Treasury yields BX:TMUBMUSD10Y may put pressure on investors to “juxtapose” prices with earnings forecasts.
“Higher yields should ultimately mean those valuations come down, but higher earnings growth could propel higher prices, so you’re having this push-pull between valuations and earnings that are going to have to battle it out this year,” Norton stated.
As the added premium for owning riskier assets versus ultra-safe assets like U.S. government debt declines, rising bond yields usually push stock values lower. However, Norton noted that there is still opportunity for valuation expansion and for stock prices to climb in spite of higher yields if a company can show significant earnings growth in the face of confidence about artificial intelligence software and a strong U.S. economy.
The Fed’s announcement on Wednesday is so hardly the only significant market-moving event scheduled for this week. A number of earnings reports from some of the biggest IT businesses in the United States will also serve as a source of inspiration for investors. Apple Inc. (AAPL) is scheduled to report on Thursday, while Microsoft Corp. (MSFT), Meta Platforms Inc. (META), and Tesla Inc. (TSLA) are scheduled to report on Wednesday following the closing bell.
A December inflation data, a preliminary reading for fourth-quarter GDP, and policy announcements from the European Central Bank and the Bank of Canada will round out the mix.
Trump’s administration will undoubtedly continue to make a number of announcements this week that will have an impact on the market. According to Mark Malek, chief investment officer at Siebert Financial, “so far, markets have reacted to every statement made by the president, even those that should not have any impact, which shows that traders have not yet settled into their pace.” “The dance marathon is really just beginning.”
With semiconductor stocks plunging after Chinese startup DeepSeek’s high-performing model sparked worries about AI-related spending, U.S. stocks fell precipitously on Monday morning. According to FactSet statistics, the S&P 500 was down 1.8%, the Nasdaq Composite COMP was down 3.1%, and the Dow Jones Industrial Average DJIA was down 0.4%.
