Fed holds rates steady despite dissenting views

Highlights: The US Federal Reserve left interest rates unchanged for a fifth consecutive meeting, in line with expectations, but the 9-3 vote revealed a lively debate within the FOMC. Despite the dissents, our base case remains for the FOMC to maintain the federal funds target range at 3.50 per cent-3.75 per cent through both 2026 and 2027 as we believe that core PCE inflation will remain stable. Markets felt the press conference lacked clarity, causing them to price in a credibility premium by lifting long-dated bond yields and pushing down USD. As the Fed will continue to have an intense debate, rate volatility may remain more elevated. But because we ultimately expect to see a stable policy rate, we see value in high-quality bonds and support for USD. We do not think rates form a major obstacle for the earnings-driven rally in equities to continue.

• We maintain a mild overweight on US equities, supported by resilient economic growth, broadening earnings and continued AI leadership. In fixed income, we maintain a neutral duration stance and favour high-quality investment-grade credit, as we focus on capturing the attractive yield and ‘clipping coupons’. We also remain positive on the US dollar, supported by resilient US economic fundamentals and relatively attractive interest rate differentials
• Fed Chair Kevin Warsh delivered a constructive assessment of the US economy, highlighting resilient growth, a balanced labour market and accelerating AI-driven investment, while reiterating the Fed’s unwavering commitment to returning inflation to its 2 per cent target. We believe that for markets, these positives outweigh investors’ perception that Fed policy lacked clarity under the new Chair
• Markets are increasingly being driven by incoming economic data rather than Fed forward guidance. While policymakers remain prepared to tighten further if inflation proves persistent, future policy decisions will depend on underlying inflation trends rather than individual data releases
• Resilient US growth, broadening corporate earnings and continued AI-led investment support our constructive outlook for risk assets. We continue to emphasise diversification across the AI ecosystem and expect policy uncertainty and evolving trade developments to create opportunities for active portfolio positioning