The US Federal Reserve

Amid mixed economic signals and rising global risks, the Federal Reserve (Fed) is holding interest rates steady and staying flexible as it monitors how conditions develop.

For the third consecutive meeting, the Federal Open Market Committee (FOMC) kept the target range for the fed funds rate unchanged at 4.25% to 4.50%. This decision was widely expected, as was Fed Chair Powell’s cautious stance on providing definitive guidance amid extreme trade and fiscal policy uncertainty. The committee’s prepared statement included changes that conveyed a continued sense of uncertainty around the economic outlook and heightened risks of both higher unemployment and rising inflation.

Nicholas Mastroianni, portfolio manager at Western Asset (part of Franklin Templeton) said, “Looking ahead, incoming data will be critically important in shaping the near-term trajectory of monetary policy. By the time of the next Fed meeting on June 18, the committee will have only one additional labor market report and two more inflation readings to consider.

“Given Chair Powell’s insistence that further easing would require clear evidence of deterioration in the hard data, it is difficult to foresee a resumption of the rate-cutting cycle in June absent more pronounced signs of stress among consumers and businesses. In our view, this suggests the Fed will remain on hold through the summer, as policymakers await greater clarity regarding ongoing developments in trade and tax policy.

“Our base case anticipates that slowing growth and moderating services inflation will become more apparent in the hard data by the September FOMC meeting, at which point the Fed will likely be able to resume the rate-cutting cycle that it initiated last year.

“In the interim, high-quality fixed income, particularly with exposure to the intermediate part of the yield curve continues to offer attractive yields and a compelling risk/return profile. Should trade policy developments impact the hard data more quickly or more forcefully than currently expected, we believe the Fed is well positioned to respond accordingly.”

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