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By Lewis Krauskopf
NEW YORK (Reuters) -The Federal Reserve meeting in the coming week is set to test the U.S. stock market's sharp rebound, with investors hoping the central bank is poised to resume lowering interest rates in the months ahead.
During the rally, stocks have erased the slump set off by President Donald Trump's sweeping tariffs. After gaining on Friday, the S&P 500 was up 0.3% since April 2, when Trump's "Liberation Day" tariff announcement sent stocks plunging and led to some of the market's most volatile swings in 50 years.
While the Fed is widely projected to hold borrowing costs steady in its monetary policy statement on Wednesday, market pricing indicates expectations that the central bank could cut as soon as June, although odds of such a move dimmed following Friday's solid U.S. jobs report.
"The Fed is one of the few levers that can be pulled in a timely fashion that can support market activity," said Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. "If they start to signal that their inflation concerns are waning, that suggests they are closer to a cut, and I think that will be well received by markets."
Trump's tariffs loom over policy decisions for central bank officials weighing concerns about a potential economic downturn against worries that tariffs will drive inflation higher.
Data this week showed the U.S. economy contracted in the first quarter for the first time since 2022, but many analysts discounted the report, saying the weakness was driven by a surge in imports as businesses sought to avoid higher costs from tariffs.
After cutting by one percentage point last year, the Fed has held its benchmark rate at 4.25% to 4.5% so far in 2025. Fed funds futures are factoring in at least three more 25-basis point cuts by December, according to LSEG data. The amount of expected easing this year fell after data on Friday showed U.S. employment increased by a higher-than-expected 177,000 jobs in April.
The White House has raised pressure on the central bank to cut rates, with Trump harshly criticizing Fed Chair Jerome Powell, who has said the Fed would await more data on the economy's direction before changing rates.
Last month, Trump raised the possibility he would seek to fire Powell, setting off market worries about damage to the Fed's independence. Trump later appeared to back off.
At next week's meeting, Powell "might continue to sound hawkish to push back on the narrative that the Fed is going to be influenced by the White House," said Angelo Kourkafas, senior investment strategist at Edward Jones.