S&P Volatility to Continue as Fed Ties Future Cuts to Economic Reports.

Is the Stock Market Entering a Data-Driven Era?

Last week’s rollercoaster in the stock market painted a clear picture—investors are on edge, hanging onto every piece of economic data. The Federal Reserve’s cautious approach, coupled with softer inflation figures from the PCE report, sent stocks swinging. As the Fed signals fewer rate cuts for 2025, one thing is becoming apparent: market movements are increasingly dictated by economic reports, particularly on inflation and labor.

Why Is the Market Reacting So Sharply to Economic Data?

Federal Reserve Chair Jerome Powell’s recent remarks underscored the uncertainty ahead. While the Fed trimmed rates by 25 basis points, Powell emphasized the need to wait for more progress on inflation before cutting further. This “wait-and-see” stance is exactly why the markets are moving with each new data release. Investors interpreted Powell’s cautious tone as a sign that future cuts hinge heavily on inflation figures and labor data, amplifying volatility.

Last week, despite a brief rebound after softer-than-expected PCE inflation data, the S&P 500 and Nasdaq still ended the week lower. The tug-of-war between inflation worries and rate cut hopes is palpable. Powell’s suggestion that inflation progress is slowing has left investors wondering if future cuts may be even more limited.

Is the Fed Signaling Prolonged Volatility?

Yes. Powell’s repeated references to caution and evolving risks suggest the market may need to brace for a longer period of uncertainty. With inflation still projected to hover at 2.5% through 2025, the Fed’s path forward remains clouded. Any deviation in inflation or job market reports could spur sudden market reversals.

Chicago Fed President Austan Goolsbee echoed similar sentiments, hinting at a shallower rate-cutting path than initially expected. Goolsbee acknowledged that the “neutral rate” and inflation’s future course remain difficult to gauge. This suggests the Fed will likely respond reactively, making each inflation report or jobs number a potential market-moving event.

How Should Investors Approach This Data-Driven Market?

For the foreseeable future, traders should prepare for heightened sensitivity to labor and inflation data. Each monthly release of the PCE index or jobs report could trigger swift market turns. This pattern won’t ease until the Fed sees consistent progress toward its 2% inflation target.

The takeaway? Stay vigilant. With the Fed anchoring policy to data, market volatility will persist. Investors might find opportunities during these swings, but the trend suggests choppy waters ahead until inflation shows clearer signs of cooling.

More Information in our Economic Calendar.