Market Update - The Fed, like consumers, businesses, and investors, remains on hold as expected

Highlights: As expected, the Federal Reserve kept the federal funds rate target range unchanged in the 4.25 per cent to 4.50 per cent range. This marks the third consecutive meeting where the FOMC remained on hold. The new Summary of Economic Projections (SEP) will be published at the next meeting in June. The FOMC continues to try to balance the recent weaker economic data and the rising risk of recession with concerns surrounding tariffs and the potential for an acceleration in inflation. For now, we remain neutral on US equities.

• Even with a likely deterioration in the future growth-inflation trade-off, we maintain our forecast of no more than 75bp of rate cuts through 2025 and 2026, and expect three 25bp rate cuts this year, in June, September, and December and no cuts in 2026. However, if the May jobs data do not show evidence of softening (in the unemployment rate, net employment growth, or both), then the clear risk to our forecast is that the FOMC may keep policy rates unchanged again in June
• During the Q+A, Fed Chair Jerome Powell repeated that FOMC “policy is in a good place, the Fed is not under pressure to move, and they don’t know where trade policy is headed -- but for now ‘it’s a fairly clear decision for us to wait and see and to watch’”. Regarding inflation, Mr Powell stated that “The underlying inflation picture is good.” and said that “It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariffs, on how long it takes for them to pass fully into prices and ultimately on keeping longer-term inflation expectations well anchored”
• For fixed income investors, despite the potential for some near-term tariff inflation, any back up in market rates continues to provide a tactical opportunity. For US equity investors, the widespread use of tariffs and the potential for accelerating inflation continues to dampen the outlook for corporate profits and economic growth in 2025. The sizable downward revision to corporate profits should incorporate any potential slowdown in economic growth and tighter corporate margins if tariffs are enacted and companies choose to assume part of the increased price levels. Until the tariff policy decisions are finalised, it seems US equities may remain volatile and the outlook for corporate profits uncertain