Fed Speaks, Markets Move: Decoding the Central Bank’s Latest Policy Outcome

At the time of the Federal Reserve’s last meeting, the overall global macro environment, though somewhat uncertain, was relatively more stable. The US-China trade tensions had not yet escalated and reciprocal tariffs were still not put on the table. President Trump had not threatened to dismiss Fed Chair Jerome Powell, and the independence of the central bank was not yet a topic of public debate.

With much changing since the Fed last met, investors across the globe were hooked on to gauge the US central bank’s outlook on inflation and growth. The undertone of the Fed’s latest messaging was clear—it’s skeptical and so cautious to act, just yet. To stress on the standpoint, Powell used the word ‘waiting’ around 25 times, emphasizing that the central bank will be on a standby as clouds around Trump’s tariffs clear out.

On that cautious note, the Fed kept interest rates unchanged, in a range between 4.25%-4.5%, where it has been since the last rate cut in December.

While the Fed does see increased risks of an uptick in unemployment and inflation amidst Trump’s sweeping tariffs, it also remains uncertain about the quantum of disruption. To that effect, Powell clarified that the central bank is in no hurry to consider pre-emptive rate cuts, flagging that inflation levels remain above target and the possibility of a near-term uptick stands across the horizon. “It’s not a situation where we can be pre-emptive, because we actually don’t know what the right responses to the data will be until we see more data,” Powell said.

Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities pointed that even Fed chief was clueless about the impact tariffs will have on the US Economy. “To determine the timing, precision, scope and scale of the impact of tariffs is very uncertain even for him. Fed will focus on the incoming data related to economic growth, inflation and unemployment to decide the next steps,” Sheth believes.

Taking the idea further, Siddarth Bhamre, Head of Research at Asit C Mehta Investment Interrmediates believes that even though sentiments have been pointing towards some slowdown, the impact of tariffs has thus far not reflected in data points.  On that note, Bhamre does not expect the Fed to be willing to act before the impact of Trump’s tariffs reflects in actual jobs and inflation data.

Powell resonated similar views, reiterating several times while delivering the policy outcome that the Fed will react only when data points hint towards weakness in the economy. Thus far, the US central bank sees the economy holding up well, meaning it doesn’t see warning signs yet. For now, with unemployment steady at close to 4% and the economy doing just fine, the US central bank remains comfortable with a wait-and-watch approach.

“The Fed is confident that the economy is on a strong footing and the impact of tariffs can be absorbed. Case in point, Q1 GDP numbers were disappointing due to swollen import figures to avoid tariffs. This will get reversed in Q2 and will be reflected in the numbers,” Bhamre said.

With Fed making it clear that it will wait and watch till datapoints provide some clarity, market expectations of three rate cuts in 2025, fuelled largely by recession fears, seem unrealistic now.

Analysts at JM Financial echoed similar views, stating that they anticipate two more rate cuts in 2025, that too in the latter half of the year. On the other hand, Barclays and Goldman Sachs are pencilling in a rate cut in July. “It will take a couple of months for enough hard data evidence to accumulate to make the case for a cut,” Goldman Sachs said in a note.