Just as ancient Greeks sought meaning in the flight of birds or the arrangement of stars, today’s Wall Street scrutinizes the Federal Reserve’s every move and utterance. Monetary policy often seems more like superstition than science.

On Wednesday, at the conclusion of their two-day meeting, the oracles of the Federal Open Market Committee (FOMC) emerged to deliver their verdict. As widely expected, the FOMC chose to hold interest rates steady, with the policy rate in the 5.25% to 5.50% range.

The rationale behind their decision lies in the impressive momentum of key economic indicators. Wage growth has been strong, and the job market continues to exhibit resilience. Meanwhile, inflation has veered higher than expected so far this year.

The FOMC conveyed a wait-and-see approach. Rates are unlikely to see a cut until September at the earliest. Rising inflation, driven partly by supply chain disruptions and robust consumer demand, continues to rattle investors and policymakers.

In its post-meeting statement, the FOMC said:

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” The FOMC used similar language at its January and March meetings.

The statement also revised the FOMC’s portrayal of its progress toward the dual mandate of stable prices and full employment. The new language is a subtle but important tweak, saying the risks of achieving both “have moved toward better balance over the past year.” Previous statements said the risks “are moving into better balance.”

At his customary post-meeting press conference on Wednesday, Fed Chair Jerome Powell delivered a rather hawkish message. He reiterated that the Fed will need to see more data that confirms inflation is sustainably heading lower before contemplating interest rate cuts.

Referring to inflation, Powell stated: “Further progress toward bringing it down is not assured, and the path forward is uncertain.”

Rising bond yields, reflecting expectations for higher-for-longer interest rates, pose a challenge for stock markets. Equities, historically buoyed by low-interest rates, now face headwinds as investors recalibrate their portfolios in response to shifting yield dynamics.

When bond yields rise, they become more attractive relative to stocks, prompting investors to reduce their exposure to equities.

Ahead of Wednesday’s decision, Fed officials had been hitting the speaking circuit. While some officials have argued that inflationary pressures may be transitory, others have expressed concerns about more persistent price increases. Wall Street’s hopes for a dovish pivot in June have evaporated.

During the first quarter of 2024, we’ve been getting disappointingly high readings for the consumer price index (CPI), producer price index (PPI), and personal consumption expenditures price index (PCE).

The vibe on Wall Street has turned gloomier. Visions of an economic “soft landing” have morphed into worries that maybe the Fed hasn’t hit the brakes hard enough.

The confluence of elevated interest rates and persistent inflationary pressures presents a formidable challenge for equity markets. That said, corporate earnings have generally beaten expectations, providing a lift for rate-sensitive growth investments.

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The uncertainty surrounding interest rates and inflation has contributed to heightened market volatility and fluctuations in investor sentiment.

It’s important to note, though, that inflation isn’t on a rampage. Deflationary forces are still at play and inflation has dramatically fallen since its pandemic-induced peak (see chart).

The equity rally persists, but it’s getting wobbly and pricier stocks are vulnerable to a correction. Defensive sectors such as health care, utilities, and consumer staples can offer stability amid this market turbulence.

The main U.S. stock market indices closed mixed on Wednesday in choppy trading, as follows:

• DJIA: +0.23%
• S&P 500: -0.34%
• NASDAQ: -0.33%
• Russell 2000: +0.32%

The good news was Powell’s assertion that the Fed’s next move would not be a hike. The portents were not all negative.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.