Fed holds firm as inflation and uncertainty persist

Highlights: At its April meeting, the Federal Reserve left the federal funds rate unchanged at 3.50 percent –3.75 per cent, marking a third consecutive meeting on hold, in line with our expectations and market consensus. The Fed remains firmly on hold with no urgency to cut, as persistent inflation, geopolitical risks, and elevated uncertainty reinforce a higher-for-longer stance. In our view, the FOMC may need to see core PCE inflation fall below 3 per cent and perhaps below 2.5 per cent before contemplating a return to possible rate cuts. Accordingly, we do not expect any rate cuts in 2026 or 2027, with policy rates likely to remain unchanged over our forecast horizon. We remain overweight US equities, supported by strong earnings growth and a resilient macro backdrop. In fixed income, we favour high-quality carry through investment grade credit and balanced duration. We continue to emphasise diversification via alternatives, including hedge funds and gold, to navigate macro and geopolitical uncertainty.

• While the policy decision was straightforward, the meeting stood out for the degree of divergence within the Committee, with an 8–4 vote, the highest dissent since 1992. One member favoured a 25bp rate cut, while three voted in favour of steady rates but “did not support inclusion of an easing bias in the statement at this time.” Effectively, these three policymakers wished to modify the FOMC’s forward guidance in a hawkish direction (likely to signal that the next policy move could be either a rate hike or a rate cut) but did not go as far as actually voting for a rate hike. Chair Powell said that a change to the language could “conceivably come as soon as the next meeting” which is scheduled for mid-June
• USD and Treasury yields surged in reaction to this, but also driven by heightened inflation fears, as futures oil prices climbed overnight to the highest level since the Middle East conflict outbreak
• Inflation remains the dominant policy constraint, with the Fed strengthening its language by removing “somewhat elevated” and now describing inflation as simply “elevated,” while explicitly linking pressures to higher energy prices and geopolitical developments
• Geopolitics has become a key macro driver, with developments in the Middle East feeding directly into the Fed’s inflation outlook and contributing to a “high level of uncertainty,” reinforcing the need for a cautious and flexible policy approach
• Policy is now close to neutral or only mildly restrictive, giving the Fed the flexibility to remain on hold and assess incoming data. Importantly, policymakers made it clear that while cuts are not imminent, hikes cannot be ruled out if inflation proves more persistent. The economy continues to expand at a solid pace, supported by resilient consumer spending and strong business investment, particularly in AI and data centre infrastructure