Markets Weigh Fed’s Policy Path as Tariff Uncertainty Lingers
The Federal Reserve reaffirmed its openness to rate cuts later this year, signaling that inflationary pressures from tariffs will likely be temporary. This dovish tone fueled a weaker dollar outlook, offering some relief to emerging markets grappling with capital outflows.
Meanwhile, the Australian dollar tumbled after a surprise contraction in employment, with 52,800 jobs lost last month against expectations of a 30,000 increase. In commodities, copper surged past $10,000 per ton on tariff-related supply risks, while gold hit another record high as investors sought safe-haven assets.
Powell Strikes a Cautious Tone, Markets React
As expected, the Fed held its benchmark rate steady at 4.5%, but Chair Jerome Powell emphasized that the risk of a U.S. recession remains low despite ongoing trade tensions. Powell’s measured remarks on inflation describing the impact of tariffs as “transitory” helped calm equity markets, while bond traders rallied around the Fed’s dovish bias, reinforcing expectations for at least two rate cuts this year.
Following the Fed’s decision, President Donald Trump renewed pressure on Powell, urging the central bank to cut rates further. However, global monetary policy divergence remains in focus:
- China’s central bank held lending rates steady for the fifth straight month, signaling a cautious approach despite Beijing’s ongoing stimulus efforts.
- The Bank of England is expected to leave rates unchanged, while the Swiss National Bank is poised for a 25-basis-point cut, highlighting growing concerns over economic growth across Europe.
Key Fed Projections: Slower Growth, Higher Inflation
The FOMC’s latest economic projections reinforced concerns about slowing U.S. growth but did little to alter rate expectations:
- PCE inflation revised higher to 2.7% from 2.5%
- Unemployment rate forecast adjusted to 4.4%, up from 4.3%
- 2025 GDP growth downgraded to 1.7%, from 2.1%
- Fed interest rate path unchanged at 3.9%
The revisions underscore the Fed’s balancing act between growth and price stability, with policymakers signaling a greater focus on sustaining economic momentum rather than aggressively combating inflation.
Global Market Implications: What Traders Need to Watch
With markets highly sensitive to central bank forward guidance, investors must stay attuned to:
- U.S.-China Trade Risks: Renewed tensions could weigh on sentiment, prompting Beijing to roll out further stimulus to support economic activity.
- China’s Policy Response: Any fresh monetary or fiscal measures from China could provide a tailwind for equities in Hong Kong and mainland markets.
- Central Bank Actions: The Fed’s latest stance reinforces the importance of forward guidance, especially as tariff-driven uncertainty persists.
While geopolitical and trade risks remain elevated, China’s stimulus efforts and ongoing innovation drive could provide a counterbalance to global growth fears. For traders, navigating monetary policy shifts will be critical in the months ahead.