As was widely anticipated, the US Federal Reserve’s decision to hold interest rates today has now been confirmed as rates will be held at 3.5-3.75%, reinforcing a “higher for longer” narrative that continues to shape asset allocation decisions for investment managers.
While the outcome was largely priced in, the context surrounding this decision is far from straightforward, with growing concerns over inflationary pressures and geopolitical tensions clouding the path ahead.
Markets have responded by dialling back expectations for near-term rate cuts, with some now questioning whether easing will happen at all this year. For investors, this prolongs an environment defined by tighter financial conditions, valuation sensitivity and increased cross-asset volatility.
Complicating matters further is the looming leadership transition at the Fed, as Jerome Powell nears the end of his term and attention shifts towards incoming Chair Kevin Warsh. With monetary policy remaining firmly data-dependent, and increasingly influenced by external shocks, the challenge for portfolio managers is balancing patience with positioning in an uncertain and fast-evolving macro landscape.
All eyes will now shift to the latest Bank of England interest rate decision tomorrow, as we await the latest MPC report on whether or not UK rates will remain unaltered, as is expected.
Sharing their reaction and analysis to today’s Fed interest rate news, industry experts have commented as follows:
With the Iran blockade to ‘undoubtedly prove inflationary’ Lindsay James, investment strategist at Quilter said:
“With Jerome Powell holding what is highly likely to be his final meeting today, it is rather apt he ends it with a hold in interest rates – the exact thing Donald Trump has chastised him for over a number of months. This meeting was always likely to end in a hold, with markets now pricing in no change to interest rates for the foreseeable future, and the expected series of cuts in 2026 now firmly off the table.
“Fed Chair nominee Kevin Warsh will arrive with the White House determined to see interest rates lowered, but in today’s economic environment even he shouldn’t be tempted to appease the President. Oil for December delivery is now at $86, up from $63 before the conflict and $74 in early March. Day by day, the expected length of the blockade gets pushed back and with it the timeframe for market normalisation and the potential for rate cuts.
“This will undoubtedly prove inflationary in the short term with the market indicating US CPI is likely to be in the region of 3.25% in a years’ time, around a percentage point higher than before the war began. The risk is that the longer this continues, the more likely it is that higher oil prices will bleed into other areas of inflation, setting off a chain reaction.
“But signals from incoming Chair Kevin Warsh imply that he will continue the existing policy to look through short term volatility, given the expectation that oil prices will fall sharply as soon as normal conditions return. Indeed with the announcement of the UAE leaving OPEC, this could put further downward pressure on prices in the medium to long term whilst recent surveys indicate US production is unlikely to fill the gap given the wide swings in oil prices caused by regular late-night pronouncements from the White House that seek to raise markets and depress energy prices. For now, volatility on multiple fronts prevents any rate cuts from being considered.”
Commenting on today’s FOMC decision, Max Stainton, senior global macro strategist at Fidelity International, said:
“In the press statement, the Committee (FOMC) unsurprisingly retained the view that geopolitical risks add an increased layer of uncertainty onto both sides of the mandate. The statement also moved to upgrade its assessment of inflation but caveated that this was primarily due to higher energy prices. This move, combined with the fact that three committee members voted against the statement as it retained its forward-looking guidance of an easing bias gave the statement a definitively hawkish, and somewhat unprecedented, twist.
“For Powell’s last press conference as a Fed Chair, it was clear Powell took a more committee-based approach to forward guidance. He reiterated that the “majority” of the committee didn’t see the likelihood of hikes, and that the committee was still largely in a wait-and-see mode to assess how the ongoing shocks play out. Indeed, the biggest action from the press conference didn’t come from the discussion of the rate outlook, which in general remained clouded by uncertainty. Instead, it came from Powell’s revelation that he will be staying on as a Fed Governor after the end of his term as Chair, arguing that current legal actions against the Fed are unprecedented, hence requiring his own unprecedented action. While this didn’t come as a huge surprise, given Powell’s previous comments that he may stay on as a Governor to protect the institutional integrity of the Federal Reserve, this move will add additional uncertainty to the outlook for interest rates going forwards.
“Looking ahead, the rates outlook for the rest of the year will increasingly be determined by the duration of the conflict in the Middle East. Our base case continues to shave dovish vs market pricing, as we expect incoming Chair Warsh, and the broader committee will want to lean against the growth damage from the energy shock with at least one cut by year end. However, with the risks of the Strait of Hormuz staying closed for longer rising, there are clear risks that the energy price shock starts broadening out into a larger inflation shock across the whole of the economy. We still expect one cut this year, but the risks are clearly skewed to ‘no action’ for the rest of the year.”
Susannah Streeter, Chief Investment Strategist, Wealth Club, said:
”Energy markets are back at panic stations, with Brent crude oil surging higher. But for now, Fed policymakers are keeping a cool head and have pressed the pause button while they assess the repercussions.
“While the energy crunch is already hurting many millions of households and pushing up costs for companies, it’s still unclear to what extent the shock will become embedded in the economy. The latest US core inflation reading is hovering at around 2.6% year-on-year, still close to target but not yet fully anchored to a downward trend. There is growing concern about the potential for companies to pass on higher costs through higher prices.
“There was unusual dissent around the table, with three policymakers not keen on including a bias towards further easing of monetary policy at this time, given the evolving outlook. For now, a wait-and-see mood is still percolating, especially given that it is a transition period for the Fed. Markets are still pricing in an interest rate cut, but on a more distant horizon, with a reduction not fully priced in until next year.
“There had been worries that incoming chair Kevin Warsh might not be as firm a bulwark against rising inflation compared to Jerome Powell. However, a Fed led by Warsh is more likely to herald a shift in tone rather than a sudden policy jolt, especially given that Jerome Powel has signalled he’s intending to stay on the Fed’s board of governors after his term ends this month. Decisions will continue to be shaped by the broader committee, and Powell will remain a force of influence and institutional stability, so change is expected to be gradual. This may provoke the ire of the President, as it means a seat on the Fed won’t become vacant, but Jerome Powell is clearly undaunted.
“Major indices drifted further into the red, as higher borrowing costs look set to linger. With Brent crude nudging $120 a barrel earlier, as President Trump upped the ante with threats towards Iran, it is also unsettling investors.
“Investors may be wise to brace for volatility ahead, as uncertainty is set to keep swirling about the future direction of policy at the Federal Reserve. This is a well-worn pattern, seen in previous transitions, and is likely to be heightened due to the unpredictability of the Middle East crisis. However, a raft of bumper big tech results later could yet see sentiment swing to the upside.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) comments:
“Today has some uncomfortable echoes of the 1970s, with the spike in oil prices pushing the US into stagflation. Growth stalled, inflation ran hot and the Fed struggled to get control of it.
“Fast forward to today. The incoming Fed chair, Kevin Warsh, faces a similar situation. President Trump is pushing hard for lower policy rates, while higher energy prices are again adding to inflationary pressures. Warsh has publicly stressed the Fed’s independence, but the real test will come from how he balances the central bank’s dual mandate: maximum employment and price stability. Start with inflation. Forward-looking indicators suggest price pressures could tick higher in the coming months, due to higher energy prices.
The longer energy stays expensive, the more those costs filter through to other sectors, which could make inflation harder to control. At the same time, higher energy costs act like a tax on the economy. They slow activity and eventually dampen inflation through weaker growth.
“That leads to the second point: growth. Energy prices staying higher for longer is a headwind for overall growth, including job creation.
“Still, the US is starting from a position of strength. Going into the current geopolitical tensions, the economy was in a phase of economic exceptionalism.
Recent data backs that up. Retail sales in March have held up even as gasoline prices climbed. April purchasing managers’ indices raised odds that the economy’s resilience was holding up into the second quarter of this year.
Investment tied to AI and government support, including tax cuts, continues to support the economy.
“Today’s inflation pressure is largely a supply-side shock, caused by the oil disruptions in the Middle East, which is difficult to fix with interest rates alone.
Hiking rates does not produce more oil or cheaper energy. And lowering them while growth remains resilient would immediately raise questions about whether the Fed is acting independently or bending to political demands.
“Altogether, we think the Fed may deliver a quarter of a percentage point cut towards the end of 2026, though the precise timing remains uncertain.
AI-driven productivity gains may ease inflation over time, while high energy prices could weigh on growth, which might ease inflationary pressures further down the line. But that is probably as far as the Fed can go. Deeper or faster cuts would risk seeing history repeat itself: being too accommodative and letting inflation regain momentum. Against the backdrop of large and widening fiscal deficits, this underpins our underweight position in US Treasuries.”
Isabel Albarran, Investment Officer at TrinityBridge says: “It was no surprise that the Fed opted to leave rates unchanged at today’s meeting, given the dual risks that the conflict with Iran poses to the FOMC’s mandate, with three dissenting votes reinforcing concerns about the growth outlook.
“The faltering progress of negotiations has hitherto dominated market moves but the outcome remains unclear. In contrast, with each day that passes, it becomes increasingly certain that oil supply will be meaningfully impacted in the coming months. The Strait of Hormuz has now been closed for two months and a record 58m barrels of oil are now stranded at sea in the region. Futures contracts are beginning to price in this reality, with June contracts at $112 per barrel, above the March peak.
“For the FOMC, this has consequences for both the inflation and growth mandates. Higher energy prices are already pushing up inflation, and this will continue. The Committee is wary of repeating the 2021 mistake of underestimating the persistence of inflation and has paused rate cuts. Conversely, the US consumer is highly exposed to energy prices, especially over the summer driving season, and consumption activity and GDP growth will take a hit, despite the boost from higher tax refunds. With evidence of the labour market weakening, it is this side of the dual mandate that we expect the Fed to prioritise.
“Looking beyond the Fed, the Whitehouse has a number of possible levers to pull, in order to support the economy. If energy scarcity becomes acute, the US can restrict energy exports, easing supply if not prices. Longer term, further fiscal support seems likely in advance of the midterm elections later this year.”
Richard Flynn, Managing Director at Charles Schwab UK, reminds us that this is also a moment of institutional significance saying:
“As widely anticipated, the Federal Reserve has held interest rates unchanged at 3.5-3.75% for the third consecutive meeting, with the ongoing conflict in Iran continuing to dominate the policy landscape. Core inflation, as measured by the Fed’s preferred Personal Consumption Expenditures index, rose slightly to 3.1% year-over-year in March from 3.0% in February, while headline PCE inflation increased to 3.39%. Despite tentative progress, price pressures remain well above the Fed’s 2% target. The labour market, meanwhile, has shown resilience, with March nonfarm payrolls of 178,000 and unemployment steady at 4.3%, but the broader picture remains one of cooling momentum rather than outright weakness.
“The dominant factor keeping the Fed in wait and see mode is the energy price shock driven by the conflict in Iran. Rising fuel costs are feeding through to consumers and clouding the inflation outlook, making it difficult for policymakers to justify easing monetary policy even as political pressure to do so intensifies. In blunt terms, the state of the Strait of Hormuz will have a significant influence on what the Federal Reserve does, or in this case, doesn’t do.
“Markets have responded by pushing back expectations for the first rate cut, with some investors now pricing in no reductions at all this year.
“This is also a moment of institutional significance. Chair Powell’s term concludes on 15 May, making this one of his final decisions at the helm of the world’s most influential central bank. Attention is now turning to his likely successor, Kevin Warsh, whose emphasis on price stability and a more orthodox interpretation of the Fed’s mandate has reinforced expectations that monetary policy will remain firmly focused on inflation even as growth moderates.
“With the Federal Reserve remaining firmly data‑dependent, and geopolitical uncertainty unlikely to dissipate quickly, market conditions are expected to remain shaped by instability rather than mere uncertainty. In this context, diversification and a longer‑term perspective are often referenced in broader market discussions.”
Jon Butcher, Senior US Economist, at Aberdeen comments;
“The Fed funds target rate was left unchanged, with Chair Powell saying policy is “well positioned” to respond to developments in the outlook.
“There was a single dissent to the vote to hold, with Stephen Miran favouring a 25bps cut. However, there were three further members who objected to the implicit easing bias in the FOMC statement.
“Powell added that the centre of gravity had shifted since the previous meeting, with more members seeing a rate hike as a possibility. He also said that he will remain on as Fed governor following the end of his term as chair, until the DOJ’s investigation is completely over.
“Kevin Warsh’s nomination as Fed chair cleared the Senate Banking Committee earlier in the day and will now go to the Senate for confirmation. A Warsh chair will likely look at numerous reforms to the Fed’s operating framework, potentially including its inflation target. But switching away from core PCE inflation to median or mean metrics risks slowing monetary policy responsiveness and potentially raises questions about credibility.
“We continue to expect the Fed to cut rates once in September and again in 2027, but risks are growing that rates stay on hold longer.”
Richard Flax, Chief Investment Officer at Moneyfarm believes that for investors, this tricky environment favours balance over boldness saying:
“The Federal Reserve’s decision to hold rates steady at 3.5-3.75%, reflects a central bank caught between tentative disinflation and renewed geopolitical risk. CPI figures from March, which showed headline inflation jumping to 3.3% from 2.4% in February, began to capture the impact of higher energy prices following the escalation in the Iran conflict, and underlines why policymakers remain cautious. While the Fed continues to place greater weight on its preferred PCE inflation measure, CPI data has shown renewed persistence just as markets had begun to anticipate a smoother path towards rate cuts.
“Although we are only just finishing April, it already feels as though a year’s worth of market‑moving news has arrived in quick succession, from renewed conflict in the Middle East and the resulting energy shock to a sharp repricing of interest‑rate expectations as central banks signal that inflation risks remain the dominant constraint.
“For investors, the key message is that the path to lower rates is likely to be slower and less predictable than markets once hoped. The resilience of the US labour market gives the Fed room to remain patient, but higher‑for‑longer rates continue to shape conditions across equity and bond markets, particularly through tighter financial conditions and pressure on valuations.
“This environment favours balance over boldness. Rather than trying to time the first rate cut of the year, investors are better served by diversified portfolios that can weather multiple outcomes, including prolonged policy restraint, pockets of volatility and uneven growth across regions and asset classes. In a world where geopolitical shocks are increasingly intersecting with monetary policy, discipline and diversification remain the most effective tools available.”
Seema Shah, Chief Global Strategist at Principal Asset Management said:
“Holding rates steady was fully expected, but the presence of three dissents against an easing bias came as a surprise—albeit an understandable one. The economic backdrop is unusually uncertain. With oil prices near $120 a barrel and inflation having run above target for five years, the Fed cannot dismiss the risk of inflation expectations becoming de‑anchored. At the same time, it cannot ignore early signs of economic and labour‑market softening as households and businesses grapple with growing affordability pressures. This leaves the path for rate cuts extraordinarily complex.
Adding to the uncertainty is the prospect of the leadership transition. With Kevin Warsh poised to take the helm, markets are weighing the possibility of a regime shift: potentially involving a smaller balance sheet, changes to inflation measurement, greater emphasis on AI‑driven productivity, and a different approach to communication. Together, these forces make the policy outlook especially hard to decipher.
That said, we expect the Fed’s easing bias to remain in place – only just – but the data will have to decisively move in a dovish direction for the FOMC to continue easing towards neutral.”
