Global equity markets rallied Thursday, led by technology and AI semiconductor stocks, after Federal Reserve officials said tariff impacts remain contained to goods prices with minimal spillover into services inflation.
San Francisco Fed President Mary Daly said inflation expectations remain anchored around the central bank's 2% target. "The effects of the tariffs have largely been confined to goods, with little spillover into services inflation," Daly stated.
The Fed is now monitoring two competing forces: potential tariff-driven inflation versus softening labor markets. Daly warned against holding rates high too long. "We see a labor market that's softening and wage growth that is moderating, so we don't want to make the mistake of holding on too long only to find out we've injured the economy," she said.
Technology stocks drove global performance, with AI semiconductor companies posting notable gains. The rally suggests investor confidence persists despite regulatory and trade uncertainties facing the sector across major markets.
Moderating wage growth removes one inflationary pressure point, giving the Fed flexibility in rate decisions without immediate cost-push concerns. Current data shows limited price transmission from tariffed goods into broader service sector inflation.
Markets are interpreting the Fed's cautious tone as supportive of equity valuations, particularly in growth-oriented technology sectors. The combination of anchored inflation expectations and softening labor metrics reduces the probability of near-term rate increases.
The divergence between strong equity performance and Fed concerns about labor health highlights a disconnect between financial markets and economic fundamentals. Technology and AI stocks continue attracting global capital despite broader uncertainties.
Investors now await additional Fed commentary and labor data to gauge the timeline for potential rate adjustments. The central bank's dual mandate requires balancing price stability against maximum employment, complicated by tariff policy unpredictability.