U.S. Fed maintains status quo on policy rates amidst Trump’s tariff uncertainty

In line with Wall Street's expectations, the U.S. Federal Reserve on Wednesday kept its key benchmark interest rates unchanged for the fourth consecutive meeting, awaiting more clarity about government policies, particularly U.S. President Donald Trump’s tariffs, and their potential impact on the economy. The U.S. Federal Reserve's Federal Open Market Committee (FOMC), led by Chairman Jerome Powell, kept interest rates steady in a range of 4.25-4.50% since its last rate cut of 25 basis points in December 2024.

The U.S. Fed has revised its inflation expectations upwards to 3% from 2.7%, while it downgraded its growth estimates to 1.4% from 1.7% for 2025.

Fed Chair Jerome Powell indicated that the American central bank would wait to understand the impact of President Trump’s tariffs on inflation before taking a call on a rate cut. Responding to a specific question on the conflict between Iran and Israel, Powell signalled that such events are unlikely to have a lasting impact on inflation through energy prices.

Fed in ‘wait-and-watch’ mode

“The main focus of Powell was on the uncertainty around the impact of the tariffs on growth and inflation; however, his commentary lacked clarity. This indicates the extent of uncertainty that even the US central bank is facing on the tariff policy,” JM Financial said in a report.

The brokerage house avers that the Fed is in a ‘wait-and-watch’ mode, saying that robust growth combined with elevated inflation would push the rate cut expectation closer towards the year-end.

“We believe that the tariff deadline (July 9) would be a key monitorable event. Any postponement would be dollar-negative, while the combination of robust growth and elevated inflation would push policy easing towards the end of 2025,” the brokerage said in its report.

“The Federal Open Market Committee’s decision to maintain the federal funds rate at 4.25%-4.5% is appreciable, given the persisting geopolitical volatilities, trade uncertainties, and the U.S. administration's decision on a 90-day tariff pause, said Hemant Jain, President, PHDCCI. Looking ahead, the Fed is expected to continue to assess the impact of new information on the economic outlook and be ready to adjust monetary policy as necessary if risks arise, he said.

Anitha Rangan, Economist, Equirus Securities, says that the Fed policy has become more hawkish than expected, not just for this year, but prospectively as well. “With the ongoing tensions around geopolitics and uncertainty around tariffs, the Fed could turn more hawkish down the road, lowering prospects of accommodation if growth does not hurt too much.”

Back home, Rangan sees the Reserve Bank of India (RBI) maintaining its “neutral” stance for a longer period. “The pause may well be the narrative until there is clarity on the external front (which seems less likely given the developments in the last three years). With rising externalities, the new norm could well be higher inflation, moderate growth, and higher rates as a result.”

She adds that for India, the Balance of Payments (BOP) risks from debt refinancing and currency pressures will be key. “While the macro strength is building, we still cannot let the guard down,” she adds.

VK Vijayakumar, Chief Investment Strategist, Geojit Investment, believes the Fed decision and commentary are on expected lines. “Jerome Powell’s comment that 'despite heightened uncertainty the economy is in a solid position' is important. However, he has warned that 'tariff effects on inflation can be persistent'. Therefore, it would be realistic not to expect rate cuts from the Fed immediately.”

With only 1.4% GDP growth expected this year, the U.S. is unlikely to attract a lot of capital flows. “This is favourable for India. But since Indian market valuations remain a concern, a sustained rally will happen only when we get indications of sustained earnings growth, which is some time away," he adds.

“The Federal Open Market Committee’s decision to maintain the federal funds rate at 4.25%-4.5% is appreciable, given the persisting geopolitical volatilities, trade uncertainties, and the U.S. administration's decision on a 90-day tariff pause, says Hemant Jain, President, PHDCCI. Looking ahead, the Fed is expected to continue to assess the impact of new information on the economic outlook and be ready to adjust monetary policy as necessary if risks arise, he adds.

Jain says the U.S. is witnessing an expansion of economic activity, with the unemployment rate at low levels. Uncertainty about the economic outlook has diminished but remains elevated.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)