Fed keeps surprises to a minimum and points towards next cut in July

The Federal Reserve kept surprises to a minimum following its May meeting, standing pat on policy in a unanimous vote and providing scant details on the possible path ahead for US rates. The grand unveiling and subsequent ignominious delay to President Trump’s tariffs has left FOMC officials stuck between a rock and a hard place. Without question, the tariffs have clouded the outlook for the US economy, yet they are also likely to give rise to increased inflationary pressures, ensuring that the path ahead for Fed rates is not exactly clear cut.

Chair Powell appeared upbeat on the economy, which he described as ‘solid’, while he brushed aside the Q1 GDP contraction, which he attributed to nothing more than an “unusual swing” in trade. He warned that US inflation could be higher under the tariffs, although he was keen to stress that more data is needed, and that the Fed wouldn’t pre-empt the impact of the tariffs on the economy.

The Fed is clearly in no hurry to pull the trigger on lower rates just yet, and Powell’s remarks all but confirm that another pause is almost certainly on the way when officials next convene in June. We see this cautious approach to cuts as perfectly reasonable, with the Fed wary of jumping the gun at a time of unprecedented levels of uncertainty. Futures are pointing to the next cut in July, which we think is a valid assumption, although fears over inflation could put pay to an aggressive pace of cuts during the rest of the year.