Market Update - US Fed remains on hold: Awaits clarity on tariffs and fiscal policy

Highlights: The Federal Reserve left interest rates unchanged at 4.25 per cent –4.50 per cent, marking the fourth consecutive meeting without a policy move. While the Fed remains on hold, the updated Summary of Economic Projections (SEP) reflects a shift in tone, with lower growth expectations and higher inflation forecasts across the board. The SEP revealed a more cautious outlook, with GDP growth revised down to 1.4 per cent for 2025 and inflation expectations moving higher. Core PCE inflation is now projected at 3.1 per cent for year-end, up from 2.8 per cent in March. The Fed’s median policy rate projection for 2025, held steady at 3.9 per cent, but the dots for 2026 and 2027 rose, signalling a potential slower pace of future rate cuts.

• Chair Powell struck a balanced tone during the press conference, acknowledging ongoing risks from tariffs and geopolitical tensions while pointing to areas of resilience in the economy. He noted that the labour market remains strong, with payrolls growing and wage rising albeit moderating, helping support real disposable income
• Tariffs were a central theme in both the projections and the press conference, with Mr Powell emphasising that while the inflation impact has yet to fully materialise, it is expected to feed through to consumer prices in the coming months. He reiterated that the Committee is prepared to adjust policy as needed but prefers to wait for clearer inflation signals
• We continue to forecast 75bp of cumulative Fed rate cuts through this year and next and see double-sided risks to both the timing and scale of potential rate cuts: Weak labour market data could lead to larger cuts, while elevated inflation would tend to imply the opposite. We forecast a Fed funds target range of 3.50-3.75 per cent at the end of next year, with the three 25bp rate cuts to be delivered in September and December 2025, and March 2026
• From an investment perspective, we maintain a constructive outlook, particularly on US equities, where strong earnings growth, AI-driven productivity gains, and structural re-industrialisation trends remain supportive. In fixed income, we continue to take a selective, high-quality approach amid volatility, while the US dollar remains under pressure as markets focus more on trade policy and fiscal dynamics than near-term Fed moves