Year-over-year inflation had fallen from its 9.1% June 2022 peak to just 3.1% by November 2023. But then came Powell’s “big mistake,” according to Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

With inflation fading, Powell began to hint near the end of last year that rate cuts were on the horizon. The Federal Reserve’s December Summary of Economic Projections showed Fed officials forecasting three interest rate cuts in 2024. And even after two hot inflation reports to start this year, Chair Powell said that the new data hadn’t “really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road towards 2%.”

Then, at the start of April, before the release of March’s consumer price index data that showed inflation rose to 3.5%, Powell held his ground, telling a group of reporters that interest rate cuts were likely “at some point” this year.

That was exactly the wrong note, according to Landsberg.

“If he had simply said they would cut rates ‘at some point in the future when the data dictated such a move,’ he would not have backed himself into a corner and market participants would not be listening to every word the Fed says, and we would be focusing on earnings,” Landsberg told Fortune via email.

Now, a series of hot inflation, retail sales, and labor market reports—along with brewing conflict in the Middle East that raises the specter of an oil price spike—have made Powell and his fellow Fed officials rapidly change their tone. In what some experts called an “unfriendly” message to investors, Powell this week lamented a lack of progress in taming inflation so far this year. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work,” he said at a policy forum on Canada-U.S. economic relations in Washington, D.C.

This flip-flop in policy is what has been driving markets down in recent weeks, according to Landsberg. The veteran wealth manager even argued that with inflation “reaccelerating,” he doesn’t expect the Fed to cut rates this year at all. 

“While it’s unlikely to occur, there is actually a strong case to be made for the Fed to raise interest rates in 2024 given elevated inflation, low unemployment, high stock prices, Bitcoin surging, and the reemergence of IPOs,” he said, adding, “The Federal Reserve is once again in a very tricky situation.”

What does Powell’s predicament mean for markets?

After surging 27% between Oct. 27 and March 28, the S&P 500 has struggled over the past few weeks, falling roughly 5%. Rising inflation and the prospect of fewer, or even zero, rate cuts are investors’ “biggest worry” and the reason behind stocks’ decline in recent weeks, according to Landsberg. The CIO argued that many market participants are looking to secure profits by selling stock after piling up gains during the S&P 500 mega-run prior to the latest correction. That means more pain could lie ahead. 

Landsberg believes investors need to prepare for a “higher for longer regime” and position their portfolios accordingly—with assets that will benefit from higher inflation and interest rates, including stocks in the energy, materials, and insurance sectors, along with commodities like oil. “Most investors are underweight inflation as they believed the Fed when it declared victory over inflation late last year,” he said.

David Donabedian, chief investment officer of CIBC Private Wealth U.S., a firm with $101 billion in assets under management, backed up Landsberg’s theory about the reason behind stocks’ recent downturn. 

“The pullback is being driven by inflation, the Fed, and bond yields,” he told Fortune via email. “There has been a significant rise in bond yields, largely because the expectation is for much less support from the Fed than was expected a couple of months ago. Investors were looking forward to lower rates and more liquidity.”

Inflation will likely remain an issue, and the Fed isn’t likely to cut interest rates as many times as previously forecast, which may continue to weigh on stocks, but Donabedian noted that corrections are normal during bull markets. There is also a “positive side” to the recent hotter-than-expected economic data, he argued: “The economy is humming along.” To that point, economists have boosted their forecasts for GDP growth substantially this year, from 1.5% in January to 2.4% in April, according to Bloomberg data.

First-quarter earnings have also been “pretty good” so far, according to Donabedian, with roughly 75% of companies beating consensus forecasts. “And the projections are for earnings growth not only to accelerate but to broaden across sectors, with more sharing in the prosperity,” he added.

However, there is an elephant in the room: the conflict in the Middle East. What was once a geographically isolated war in Gaza has now spread into a regional conflict, with Iran and Israel clashing and Houthis attacking ships in the Red Sea. Rising tensions in the Middle East have already increased oil prices and hampered supply chains, but experts fear more pain could be on the way for the global economy and markets.

“Right now, the conflict in the Middle East is not driving the equity market, which is focused on inflation, the Fed, and bond yields,” Donabedian said. “However, the equity market will look at the price of oil … If it spikes, then the market will pay attention. If the conflict goes the wrong way, then there will likely be a knee-jerk selling reaction.”