Federal Reserve Holds Firm on Rates Amid Economic Shifts

The Federal Reserve is expected to maintain current interest rates at its May 7, 2025, meeting, despite external calls for cuts. Fed Chair Jay Powell has emphasised a cautious approach, noting that inflation stability is critical before easing monetary policy. He highlighted the economy’s resilience, supported by a solid labor market, but stressed that sustained price stability is essential to prevent temporary price surges from becoming persistent inflation. Fed Governor Chris Waller reinforced this stance, indicating that significant economic shifts are unlikely before July, reducing the chances of rate changes in the near term.

Recent economic data paints a mixed picture. First-quarter GDP contracted due to a spike in imports as businesses preempted tariff impacts. However, declining new orders and slowing international shipping signal potential supply chain disruptions. Retail leaders have warned of possible shortages, which could exacerbate price pressures. Consumer confidence is waning as higher costs and job security concerns mount, compounded by proposed government spending cuts. Businesses, facing these headwinds, are scaling back hiring and investment, pointing to slower economic activity ahead.

Looking forward, the Fed anticipates inflation will ease by late 2026, driven by declining service sector prices, such as in travel and hospitality, and moderating housing costs. This could pave the way for rate cuts starting in the third quarter of 2025, with a projected 100 basis points reduction as the base case. The Fed’s ongoing purchase of Treasuries supports bond markets, while its cautious stance may temper longer-term Treasury yields. On the currency front, the dollar is unlikely to see significant movement unless trade developments or key economic data shift market expectations.