Jerome Powell said last week that the economic outlook remains highly uncertain, and he warned that the conflict in the Middle East has added to that uncertainty. He also said higher energy prices will push up overall inflation in the near term, while the scope and duration of the effect on the economy remain unclear.
The warning landed while the Federal Open Market Committee has kept its benchmark rate unchanged for three meetings, a stance that has not stopped traders from betting on cuts. Futures pricing showed expectations for at least one 25-basis-point cut by April and at least two by December, even as JPMorgan Chase economists looked past this year and said policymakers would hold rates steady through the remaining months of 2026 before turning to rate hikes in the third quarter of 2027.
The market backdrop helps explain why Powell's comments mattered. The S&P 500 currently trades at 20.9 times forward earnings, above its five-year average of 19.9 times forward earnings, after recovering from a slide that left it 9% below its peak in late March and then carrying the index back to record highs. In March, Consumer Price Index inflation jumped 90 basis points to 3.3%, and the Federal Reserve Bank of Cleveland's forecasting tool puts CPI inflation near 3.6% in April.
That combination leaves investors reading the same data in opposite ways. Earlier in the year, many expected the Fed to cut interest rates at least twice in 2026, but Powell's latest remarks, delivered during his final press conference as Federal Reserve chairman, fit a picture in which inflation is still running hot, oil prices remain above $100 a barrel and geopolitical tensions are not easing.
The tension is that markets are still priced for easier policy while the Fed is signaling caution. Powell did not promise more tightening, but JPMorgan Chase's forecast and the inflation numbers suggest the path back to lower rates may be longer and rougher than traders had been assuming. For investors, that is the message behind the Jerome Powell stock market warning: the rally is intact, but the policy cushion they were counting on is not guaranteed.