Fed Expected to Remain on Hold and ‘likely’ a ‘Nothing Burger’

It is widely regarded as a ‘sealed deal’ that the US Federal Reserve (Fed) will maintain the current target rate at 4.25% – 4.50% today, marking a fourth consecutive meeting on hold. This is likely to displease US President Donald Trump, who has repeatedly called for rate cuts, recently referring to the Fed Chairman Jerome Powell as ‘stupid’.

Despite Trump’s approach, I do not see a path where the central bank needs to cut rates today. While I would agree that the US economy is softening, it is not sufficient to ring alarm bells at the Fed. May’s inflation data were soft, suggesting stickiness and limited impact from tariffs, and domestic demand remains stable. Meanwhile, while the job market has demonstrated signs of weakening, the US remains at full employment. Couple this with vague trade policy and the recent escalation between Israel and Iran – with US involvement a possibility at this point – the Fed are unlikely to move on rates until later on in the year.

Markets are pricing in around two rate cuts this year (matching March’s Summary of Economic Projections [SEP]), targeting either the September or October meeting for the first 25-basis-point (bp) rate reduction. Were the Fed to throw a curveball and surprise markets by cutting rates by 25 bps today, it would trigger a sizable downside move in the US dollar (USD) and underpin a bid across the US equity market.

With that said, with a rate cut already baked in, the market’s focus will shift to the Fed’s rate statement, the press conference, and the updated SEP. Importantly, the fresh projections are the first out of the Fed since Trump’s ‘Liberation Day’ tariffs in early April.

Uncertain Times

Uncertainty, although a somewhat overworked term at present, remains pertinent in today’s macroeconomic backdrop. Consequently, the Fed’s job of updating the dot plot (and the economic projections) is challenging. Like the market, Fed officials will struggle to gauge what the near-term future holds.

I would not be surprised to see Powell echo a similar sentiment to the one expressed at the March meeting. Nevertheless, it should not raise too many eyebrows to see the Fed adopt a more hawkish tilt in its updated projections, with a slight upward (downward) revision to inflation (GDP [Gross Domestic Product).

However, a marked change in direction in terms of lowering rates in the future from the Fed today is certainly something investors will be watching for, and could lead to increased volatility across major asset classes. If we see a dovish pivot, I will closely watch Spot Gold (XAU/USD), which has been hovering around all-time highs of US$3,500 for some time now.

Spot Gold Trading at Demand

A dovish scenario today could push the yellow metal towards the noted all-time high. As you can see from the chart below, daily flow has buyers and sellers squaring off within demand at US$3,343-US$3,392, which may provide enough of a floor to press higher today. In the event of a break south, the first port of call in terms of support would be at US$3,280, followed by another layer at US$3,208.

Written by FP Markets Chief Market Analyst Aaron Hill