Markets Assess Fed’s Direction Amid Tariff Uncertainty
The US Federal Reserve has insisted that interest rate cuts are still on the table this year, saying inflationary pressures from tariffs are expected to be temporary. The dovish tone has weakened the US dollar, providing some relief to emerging markets facing capital outflows.
Meanwhile, the Australian dollar fell after jobs data surprised markets as the country’s economy lost 52,800 jobs last month, compared to expectations of a 30,000 gain.
Powell Signals Caution, Markets React
As expected, the Fed kept its benchmark interest rate at 4.5%, but its Chairman Jerome Powell stressed that the risk of a recession in the US remains low despite ongoing trade tensions.
Powell’s more dovish remarks on inflation described the impact of tariffs as “temporary” and helped calm equity markets, while traders reinforced expectations of at least two rate cuts this year.
However, as soon as the Fed's decision was announced, President Donald Trump put pressure on Powell again, urging the central bank to cut rates more aggressively. At the same time, global monetary policy divergences were also in the spotlight:
China's central bank kept its lending rate unchanged for the fifth straight month, signaling a cautious approach even as Beijing continues to stimulate its economy.
The Bank of England is expected to keep interest rates on hold, while the Swiss National Bank is expected to cut rates by 25 basis points, reflecting concerns about economic growth in Europe.
Fed Economic Outlook: Slower Growth, Higher Inflation
The latest economic outlook from the Federal Open Market Committee (FOMC) reinforced concerns about a slowdown in US growth, although it did not significantly change expectations for the direction of interest rates:
PCE inflation forecast raised to 2.7% from 2.5%
Unemployment rate expected to rise to 4.4% from 4.3%
2025 GDP growth forecast lowered to 1.7% from 2.1%
Fed interest rate outlook held at 3.9%
The revision highlights the Fed’s challenge in finding a balance between economic growth and price stability, with policymakers prioritizing supporting economic momentum over being too aggressive in tackling inflation.
Global Market Implications: What Should Traders Watch?
In an environment where markets are highly sensitive to central bank policy signals, investors should pay attention to several key factors:
US-China Trade Risks: Re-escalating tensions could weigh on market sentiment, forcing Beijing to implement more economic stimulus.
China Policy Response: Any monetary or fiscal easing from China could potentially support equity markets in Hong Kong and mainland China.
Central Bank Action: The Fed’s cautious stance underscores the importance of forward-looking policy signals, especially in the face of global tariff uncertainty.
While geopolitical and trade risks remain elevated, China’s stimulus measures and economic innovation drivers could act as a buffer against concerns about global growth.
For traders, adjusting strategies to monetary policy changes will be key to weathering market uncertainty in the months ahead.
