US Fed Rate Outcome: What Are Investors Betting On?

The US Federal Reserve is slated to deliver its interest rate decision around midnight (IST) while it remains caught amidst a trifecta of trade tensions, geopolitical flare-ups and concerns over growth slowdown.

Market participants across the globe are betting on the Fed holding interest rates steady when it delivers its latest monetary policy decision. The move is expected to garner flak from US President Donald Trump who has pressurized Fed Chair Jerome Powell to pull the breaks off of rate cuts multiple times. On several occasions, Trump has called for the Fed to cut interest rates by a full percentage point to safeguard US economic growth.

However, the Fed has a balancing act to play. Lately, policymakers have been cautious about cutting rates, worried it might spark inflation all over again, something they’re keen to avoid as the economy teeters on a tightrope, already under pressure from Trump’s sweeping tariffs. While cutting interest rates might offer a quick lift to the economy and help create jobs, it also risks loosening the Fed’s grip on inflation, which could come back stronger than before.

Staying true to its data-driven approach, the Fed has made it clear that future moves will depend on the numbers and for now, those figures are offering some breathing space. Inflation appears to be cooling, and while the job market isn’t as strong as it was last year, it’s still holding up well, with unemployment at 4.2% and May’s inflation reading easing to 2.8%.

 “The US Fed is likely to remain on hold, maintaining its data-driven stance. Recent labour market data has shown resilient job growth but also some cracks, such as a falling participation rate. Inflation continued to moderate but inflationary risks from tariffs not ruled out. Inflation pressure has not subsided sufficiently to embark on the second round of policy easing,” said David A. Meier, Economist, Julius Baer.

These data point can at least help buy some time for the Fed to hold on to its ‘wait and watch’ mode and market participants are pricing exactly that. Data as per CME’s FedWatch suggests almost a 100% of market participants betting on the Fed holding interest rates steady, with expectations that it will eventually trim rates in its September meeting.

On the other hand, Julian Schaerer, Economist, Julius Baer highlighted that at the current stage, an inflationary impact of Trump’s recently announced tariffs is hardly visible, with goods inflation still subdued and services inflation broadly steady.

To that effect, analysts at SBICAPs also see a probable risk of US inflation rebounding once inventories of cheaper imports are depleted which might force the US Fed to hold rates higher for longer.

As of now though, Devarsh Vakil, Head of Prime Research at HDFC Securities expects the central bank is widely expected to maintain interest rates at their current level. However, Vakil believes it will be comments from Chair Jerome Powell regarding the future path of interest rates that will be of far more importance.

Taking it further, Schaerer expects the Fed to stay steady on interest rates for as long as data shows a negative impact from erratic policymaking, which will then demand a quick removal of the restrictive stance with two rate cuts of 50 bps each in September and October. “Should data surprise to the upside, delays or a more gradual policy easing are possible,” Schaerer added.

With a rate cut largely off the table for now, attention will shift to the Fed’s updated ‘dot plot’ to gauge future policy shifts. The Fed had last released its ‘dot-plot’ at its March meeting which was before Trump launched sweeping tariffs on trade partners. At the time, the Fed was anticipating two more rate cuts in 2025, however, with the evolving policy presenting upside risks to inflation, the sentiment might have changed.

"Current economic conditions support a cautious approach. The updated dot plot projections will likely reflect this uncertainty, with Fed officials reducing their anticipated rate cuts from the two cuts projected in March to potentially just one for 2025," said Viram Shah, Co-founder & CEO, Vested Finance.

"This measured approach reflects both economic prudence and recognition that policy certainty requires clearer signals about the economy's direction amid evolving fiscal policies," Shah added.

Ultimately, what markets are looking for tonight is not just a rate decision, but rather clarity. Investors will be reading between the lines of Powell’s speech and the dot plot to understand how the Fed is interpreting the shifting trade and economic landscape under Trump and his erratic moves.