The Federal Reserve left rates unchanged, but indicated that cuts were likely later this year. American stocks barely bounced after the Federal Open Market Committee took a decidedly dovish stance at its Wednesday meeting.

More indicative than the performance of the broad indices was the sectoral response to the Fed statement. The biggest winners, apart from miners, were health care and utilities, that is, the stocks that most resemble bonds.

This suggests that investors take the Powell put for granted, but want to see light at the end of the trade war tunnel before paying more for stocks. This will be a source of some frustration to President Trump, who has jawboned the Fed to keep interest rates down – and reportedly looked into the possibility of demoting  Fed Chair Jerome Powell – while he pursues a tariff war with China.

The Fed can pump all the air it wants into the market, but the bubble leaks as fast as the Fed can pump. A drop in interest rates doesn’t necessarily do much for growth expectations and the equity market.

The yield of 10-year inflation-indexed Treasury securities dropped to 36 basis points from 44 basis points just before the FOMC’s 2 pm announcement, and fed funds futures indicated that the Fed would reduce its overnight rate in 12 months to 1.5%, vs a projected level of 1.61% just before the FOMC statement.

US interest rates retraced to their levels of last Friday morning just before President Trump’s tweet on China trade negotiations prompted a dash out of risk hedges. Stocks bounced slightly on the news. The S&P 500 was up about half a percentage point, while the more growth-sensitive small-cap stock indices were virtually unchanged. In effect, the market is saying that the Powell put will allow stocks to more or less hold the present level, but it won’t give the market any real forward momentum.

The Fed statement indicates as directly as the Fed dare say it that plummeting inflation expectations are a worry. It forecast PCE inflation at just 1.5% in 2019, projecting a recovery to the Fed’s 2% inflation target in 2020. Like the European Central Bank, which took an unexpectedly dovish stance at its meeting earlier this week, the Fed is worried about the sharp decline in 10-year inflation expectations since October, from about 2.2% last October to about 1.77% now.

As Powell told a press conference, inflation weakness could precipitate a difficult to reverse a decline in long-term inflation expectations. Two rate cuts this year is as close to a sure thing as any prediction in an uncertain market can be, but stocks will be watching the Osaka summit more closely than the esoteric language of Fed statements.

President Trump appears to believe that he can risk a hit to growth in a tariff war with China (or others) as long as the Fed keeps interest rates low. Apart from the propriety of jaw-boning what is supposed to be an independent central bank, it’s bad economics. Tariffs are taxes, and taxes have a more direct impact on growth than monetary policy.

That was the “Mundell theorem,” the foundation of supply-side economics in the Reagan era: Cut taxes to spur growth and tighten money to reduce inflation. Reagan’s tax cuts and then Fed Chairman Paul Volcker’s tight money policy produced record growth and falling inflation.

After his largely successful 2017 tax cut, Trump has proposed the exact opposite of Reagan’s policy. That is, he has raised taxes by imposing tariffs and threatened to raise them further, while demanding chapter money. The Fed can’t compensate for the depressing effects on growth by cutting interest rates. The market response to the Fed today is a good example (stocks that trade somewhat like bonds did well, growth stocks less so).