The US Federal Reserve remains comfortably committed to its wait-and-see approach

Overview

• The FOMC unanimously voted to keep interest rates unchanged for the fourth consecutive meeting — a move that was widely expected by market participants.
• The new dot plot has shifted slightly more hawkish. While the median Fed official still projects two rate cuts in 2025 — unchanged from the March and December forecasts — the average projection has clearly moved higher. Additionally, FOMC participants now anticipate fewer rate cuts in 2026 and 2027.
• In its key economic projections, the median Fed official again revised up the underlying inflation forecast to 3.1% by the end of 2025, up from 2.8% in March and 2.5% in December. Growth projections were revised down to 1.4% for the end of 2025, from 1.7% previously and 2.1% two projections ago. Notably, the Fed expects inflation to remain temporarily elevated before easing next year, suggesting that current inflation pressures are viewed as transitory.
• In his press conference, Fed Chair Powell acknowledged persistent — though somewhat reduced — uncertainty in the economic outlook, stating: “With uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction.” He placed greater emphasis on upcoming data releases, adding: “We feel like we will learn a great deal more over the summer on tariffs.”
• Tariffs were a central topic in Powell’s remarks, with Fed policymakers expecting their effects to emerge later this quarter. He also commented on the conflict in the Middle East, suggesting it was unlikely to exert prolonged pressure on energy prices given the United States’ reduced dependence on the region for oil.
• Market reactions were minimal, with bond yields, the S&P 500, Nasdaq, and the Bloomberg Dollar Spot Index all ending the day largely unchanged. Investors appear to interpret Powell’s comments as reinforcing a wait-and-see approach, with the Fed expected to remain on hold amid ongoing uncertainty.

Market moves

Betashares Fixed Income desk comments

• The Fed remains comfortably committed to its wait-and-see approach. While economic uncertainty has lessened, it is still considered elevated enough to justify continued caution. Notably, the Fed continues to describe the US economy and labour market as “solid”, giving it the flexibility to remain on hold while awaiting more definitive data.
• Tariffs took centre stage, though its impacts on inflation are still viewed as Transitory by the Fed. On a related note, the comments and pressure from Trump have largely been ignored by Powell; the markets are looking to the end of Powell’s term as Chair in May 2026 to price in a Dovish tilt by a Fed influenced by Trump.
• The desk got a strong feeling of “nothing to see here” from this FOMC, and markets did not gain any new information outside of its expectations. As such, the desk maintains its view of being selectively constructive on duration. That is, we prefer domestic duration over international and see higher relative value of AUD bonds over foreign currency bonds.

Fed dot plot

An interesting takeaway is the near-even split among FOMC participants for their 2025 rate projections — between no cuts and two cuts — highlighting ongoing division on the outlook.

Source: Bloomberg

Fed summary of economic projections

Source: US Federal Reserve

Bloomberg intelligence NLP model

The model indicates that the sentiment of Powell’s opening statement was mildly dovish, while still aligning with the neutral tone consistent with the Fed’s wait-and-see approach over the past nine months.

Source: Bloomberg

Long run history of Fed funds rate vs US 2- and 10-year government bond yields

Source: Bloomberg