The US Federal Reserve (Fed) has kept interest at current levels – 4.25% to 4.5% – where it’s been since December. Behind the decision lie concerns about uncertainty, risks of inflation rising and Trump’s economic agenda.
For wealth managers trying to get a handle on investment decisions, but with so much uncertainty around, it’s a tricky task for sure. Sharing their reaction to today’s interest rate news, investment strategists and economists commented as follows:
Tiffany Wilding, Economist at PIMCO said: “As expected, the U.S. Federal Reserve (Fed) left interest rates unchanged. In addition, the Fed released updated economic forecasts in its Summary of Economic Projections (SEP), including its “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future. The updated projections showed a median expectation of two rate cuts this year, unchanged from the previous projections in December; however, underlying the median, a majority of participants revised higher their rate path forecast. Fed officials also revised higher their inflation forecasts, while revising lower their growth expectations.
“Higher inflation forecasts, coupled with lower growth forecasts, likely reflect changing assumptions around government trade policy and higher expected tariff rates. The upward inflation forecast revisions were concentrated in 2025, consistent with Fed Chairman Jerome Powell’s statements at the press conference that tariffs should produce transitory inflation. However, even a transitory price level adjustment, has pushed out the expected timing of inflation’s return to 2%, and in turn the expected return to neutral policy of many Fed officials.
“Fed officials are facing the challenge of balancing rising inflation and recession risks that appear to be rising in tandem. In the near term, Powell signaled that officials are comfortable keeping rates on hold and proceeding cautiously on rates. However, we think unemployment will be the ultimate arbiter, and still expect the Fed to cut aggressively in the event that the unemployment rate starts to move higher.
“Fed Chair, Jerome Powell, still sees two further cuts happening at some point during 2025 but the outlook remains highly uncertain. But are the Fed’s inflation concerns moving up – contrary to January’s statement from Powell that it was ‘well anchored’? With uncertainty about tariffs, how much, when they apply and where etc, the Fed seems to be waiting for further clarity before making any moves.”
Lindsay James, investment strategist at Quilter said: “As was expected, the Federal Reserve has chosen to hold interest rates as it looks to navigate what has been a whirlwind two months of economic policy. Jerome Powell is flying somewhat blind given not only the extremity of the tariffs being announced by Donald Trump, but his willingness to U-turn at the last moment, making any attempt by businesses and the Fed to plan all but futile. Trump is desperate for rates to be cut but is likely to be left waiting given the need for calm heads in the current economic environment.
“The problem the US faces is that inflation remains a primary risk and is showing signs of consumer expectations becoming unanchored from the 2% target. Leading indicators of demand may be slowing in the US, but inflation persists and risks spiralling if the proposed economic policies continue. Trump’s election campaign focused hard on bringing inflation down, but this is unlikely in the short-term. This is happening at the same time as economic growth is expected to slow and the employment data looks marginally weaker. Indeed, the Federal Reserve themselves have cut its own GDP forecasts and expects higher inflation in the meantime, an unwanted mix for any economy let alone the biggest in the world.
“Jerome Powell avoids politics as far as he can, but investors will be hoping he offers some kind of reassurance that he is balancing obvious inflationary pressures with a watchful eye on employment. There have been early signs that employers are becoming more cautious, for instance showing a preference for part time employees at the expense of full time. Investors will be hoping to hear a reassuring tone however all the Fed can realistically do is acknowledge that there is increasing uncertainty on both sides of their dual mandate. Unless one side deteriorates faster than the other in the coming months, then the Fed is likely stuck in a holding pattern until the data becomes clearer.”
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International comments: “At the latest Federal Open Market Committee (FOMC) meeting, as expected the Fed remained on hold. The pace of quantitative tightening was slowed which was signalled as a technical change rather than reflecting any change in policy intention.
“As the inflation forecast for 2025 was moved up with a lower pace of growth estimate, there was a clear stagflationary feel to the latest forecast adjustments. Chair Powell did refer to tariffs as potential source of transitory inflation, but echoes of 2021/2022 meant it was a low conviction argument. Overall, Chair Powell signalled willingness to wait till clarity emerges given changes to tariff, immigration, fiscal and regulatory policies and their impact on the economy.”
“We remain of the view that Fed may not cut this year or the very least bar to cut from here remains extremely high given opposing forces of higher inflation and lower growth in play currently.”
George Lagarias, Chief Economist at Forvis Mazars comments: “The price of uncertainty is becoming all too tangible for investors and consumers. And US policy spillovers appear unavoidable. The Fed keeping rates, reducing the pace of quantitative tightening and signalling two cuts until the end of the year was all too expected. What is important is its outlook, which suggests less US growth and yet more inflation as a result of Washington’s new economic policies. Consumers and investors who were hoping for a quick de-escalation of rates in 2025 are now faced with a new economic reality of high interest payments against a backdrop of lower real growth. And central banks across Europe, which may see even weaker growth and lower inflation are now also faced with a dilemma: will they follow the US central bank in keeping rates higher, or will they desynchronise and risk capital outflows?”
Joshua Jamner, Senior Investment Strategy Analyst with ClearBridge Investments, a Franklin Templeton company, commented: “The ‘wait and see’ Fed remained on hold by keeping interest rates steady. The Fed dots implied that policymakers now anticipate a less favorable economic backdrop to unfold this year with modestly slower growth, higher inflation and higher unemployment. These changes are consistent with estimates that have been circulating on Wall Street in recent weeks from banks and macroeconomic research boutiques and should not have a major impact on financial markets, in our view, as a result. Ultimately, Fed policy is taking a back seat to the fiscal side of the equation, and with Fed funds futures market pricing implying the next rate change will not occur until the late July meeting, this dynamic is unlikely to shift in the near term.”
Jochen Stanzl, Chief Market Analyst at CMC Markets said: “As expected, the Fed did not adjust its interest rate. As hoped, it has throttled the pace at which it is reducing the size of its balance sheet. At first glance, this appears to be a sound interest rate decision for investors. However, the Fed is now also highlighting growing economic risks – something it did not do last time. We also note that Christopher J. Waller opposed a slowdown in the pace of the Fed’s balance sheet reduction.
It is becoming increasingly likely that the number of people in work will decline in the coming months, and the rate cut that the Fed has shelved for today will simply take place later in the year. To avoid leaving the markets entirely on their own, the quantitative tightening programmes have now been throttled back. The uncertainty surrounding trade and economic policy is putting the hard-won progress of the Federal Reserve to the test – progress which has so far managed to reconcile growth with the fight against inflation. It is a difficult puzzle for the Fed to solve with these new political challenges, and it wants more time to find its bearings.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) comments:
“It’s not surprising that the Fed signalled that it’s likely to deliver two quarter-point interest-rate cuts later this year, the same median forecast as three months ago, even as policymakers forecast slower economic growth and stickier inflation.
“The more interesting bit is that there was disagreement among policymakers about the appropriate path of policy, reflecting uncertainty over how the Trump administrations trade tariffs might impact the economy, and how the Fed should respond.
“Inflation is still above target. But the general trend so far remains one of moderation, perhaps an uneven one, but moderation nonetheless.
“In the near term, we think the Fed is likely to keep interest rates unchanged, given the high degree of uncertainty and the potentially inflationary effects of US trade and fiscal policies.
But, even though we doubt that the economic dataflow is as weak as some of the high-frequency indicators suggest, we do see slower economic activity, partly because of elevated uncertainty hitting consumer, business and investor confidence.
“This is why, on balance, we believe that the Fed is still more likely to cut than not this year, and maybe sooner than envisaged prior to the latest inflation report.
“These developments, along with the ongoing trade and geopolitical uncertainty hitting markets, has key investment implications.
“US tariffs, market fundamentals and geopolitics have caused a change in leadership in 2025: European equities are now outperforming their US counterparts due to improving corporate earnings relative to expectations, more attractive valuations and newly announced government spending, including for defence and infrastructure.
“And, while US tariffs are a downside risk, lower uncertainty and energy costs should the Russia-Ukraine war end is an upside risk. Therefore, we have recently decided to increase our exposure to European equities to a tactical overweight.
“To fund this trade, we’ve sold some US equities. We still think innovation in the US is continuing apace, and AI-related themes remain compelling from a medium-term perspective. But, tactically, as valuations are demanding, and policy uncertainty is higher, we’ve reduced our exposure.
“We maintain our overweight on a US equal-weighted equity index, giving greater emphasis to attractively valued sectors that might benefit from US policies, such as fiscal stimulus and trade protection, from industrials to financials.
“We also maintain our derivatives-based strategy, with two instruments that appreciate when US or European equities fall. This strategy helps mitigate downside risks, effectively acting as an ‘insurance’ against unforeseen drawdowns.
“At the same time, we’re underweight US Treasuries on fiscal concerns, preferring short-dated European and UK government bonds. Similarly, we prefer European investment grade corporate bonds to their US counterparts.“
