Lewis Krauskopf
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By Lewis Krauskopf
NEW YORK (Reuters) -The Federal Reserve's balancing act between concerns about a weakening labor market and still above-target inflation will take center stage for investors in the coming week as they weigh risks to the rally in the U.S. stock market.
The benchmark S&P 500 has rebounded sharply over the past two months as worries about the impact of trade barriers on the economy have eased since President Donald Trump's "Liberation Day" announcement on April 2 sent the market plunging.
The rally hit a stumbling block on Friday as stocks fell globally and investors moved to safe-haven assets after Israel launched a military strike on Iran, and Iran fired missiles in response. Major U.S. indexes ended down over 1% on Friday, with the S&P 500 falling 1.1%.
The Fed's two-day monetary policy meeting could present the next major obstacle for markets. While the U.S. central bank is widely expected to hold interest rates steady when it announces its decision on Wednesday, investors are eager for any hints about whether the Fed might be poised to lower rates in the coming months.
The fed funds rate has been at 4.25%-4.50% since the central bank last eased in December, by a quarter percentage point.
"What the Fed is going to have to try to do next week is encourage the belief that they are able to act without actually promising anything," said Drew Matus, chief market strategist at MetLife Investment Management. "If they move rates lower too early before there is evidence that there is weakening in the economy that they can then point to, they raise the risk of actually boosting inflation expectations further."
At its last meeting in May, the central bank said risks of both higher inflation and unemployment had risen. The Fed has a dual mandate to maintain full employment and price stability, and investors will be seeking any signs of whether officials are more concerned about one of those goals and what that means for the path of rates.
One area of focus on Wednesday will be an update to Fed officials' projections about monetary policy and the economy, which were last published in March.
Larry Werther, chief U.S. economist of Daiwa Capital Markets America, will be watching estimates for unemployment. While the Fed officials' last projection was for unemployment to end 2025 at 4.4%, Werther is projecting a year-end rate of 4.6%, saying recent data including jobless claims has indicated softening in the labor market.
"If the unemployment rate is expected to move higher, just aligning with what we've seen in the labor market, and inflation isn't expected to move much beyond what the Fed is projecting, then it opens the door to further easing in support of the labor market later this year," Werther said.
