Market Update: Strong economy and tariff uncertainty keep hawkish Fed on hold again

Highlights: In a move largely anticipated by markets and us, the Federal Reserve left interest rates unchanged at 4.25 per cent – 4.50 per cent, but the meeting was still seen as slightly hawkish. The Fed noted that economic activity has “moderated” in recent months, while inflation remains elevated but continues to ease. The Fed Chair, Jerome Powell, reiterated that the “main number you have to look at now is the unemployment rate,” since labour supply and labour demand appear to be slowing in tandem. Powell emphasised his data-dependent approach and offered no clear timelines for cuts, signalling the Fed’s intent to keep rates high until inflation convincingly moves toward the 2 per cent target. We maintain our overweight on US equities, given the economy’s relative strength to other markets, strong earnings growth, the Fed’s eventual pivot, and the tailwinds from structural themes around technology and AI revolution, the reindustrialisation of the US economy, and reshoring of key industries, which together support a favourable risk-reward outlook.

• While markets slightly reduced the chances of rate cuts after the meeting, we still forecast 75bp of cumulative Fed rate cuts through this year and next (25 bp in September, December and March). Given the Fed’s focus on unemployment, the Payroll figure on Friday is key to watch, especially as markets’ inflation expectations have been drifting up a bit
• We remain neutral overall on fixed income but continue to tactically add high quality bonds for income and stability, using an active approach to find selective opportunities
• The US dollar still faces questions over trade policy, the path for the US budget deficit, and the political pressure on the Fed, but economic resilience and recent trade deals are helping USD stabilise. Significantly, any further weakness in USD could actually improve mega cap earnings prospects
• We maintain our US equity overweight. While the hawkish tone had a slight negative impact on stocks, overnight tech results are already helping the market rebound. Economic resilience and solid earnings are offsetting the rate risks for stocks. However, risk assets could come under fire if 10-year Treasury yields were to rise closer to the 4.7 per cent level (currently 4.35 per cent). As long as the Fed continues to signal rate cuts down the road, risk assets can take comfort in that and focus on the positive fundamentals driven by the tech revolution, productivity gains, steady margins, and the improving earnings outlook through year-end 2026