FOMC holds rates as market uncertainty remains elevated
Summary
On Wednesday, May 7, 2025, the Federal Open Market Committee (FOMC) voted unanimously to hold the fed funds rate at a target range of 4.25% - 4.50%. The FOMC statement mentioned an increase in uncertainty around the economic outlook since the last meeting. The Fed board believes its monetary policy is currently well positioned to adjust with market developments. Chair Powell’s comments reinforced the Fed’s position that it does not want to preemptively cut rates, given the risks of higher inflation presented by tariff developments. Powell also noted that the dual mandate of maximum employment and a 2% inflation target could end up in conflict if the job market begins to deteriorate while inflation simultaneously increases. Powell stated that the board feels comfortable remaining at current policy levels until they see data that shows a reason to act.
Impact on rates
Interest rates saw little change after the FOMC meeting, as Chair Powell emphasized the need for greater clarity on the economic impact of tariff policies. The market will be highly focused on tariff negotiations as well as the data being monitored by the FOMC. The Fed expects tariff policy could present upward pressure on inflation, the severity of which depends on the tariff negotiations. The market expectations for the rate path will also be heavily impacted by the ongoing negotiations. Chair Powell stated that, given the current strength of the labor market and inflation near the 2% goal, the FOMC board has time before they will need to act. The previous FOMC rate path projection showed an expectation of two rate cuts in 2025, while the swaps market currently anticipates three cuts. The next FOMC projection will be released in their June meeting.
Moving forward
After today’s meeting, the swaps market remains relatively unchanged with an expectation of three rate cuts in 2025. The first cut is currently being priced in to occur during The Fed’s July rate decision. The market will continue to focus on economic data related to the U.S. job market health and inflation pressures. Tariff negotiations will remain a source of volatility as higher tariffs could lead to higher, more persistent inflation pressures. Chair Powell remained adamant that the FOMC’s current policy puts The Fed in a strong position to address market developments.
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Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
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