The next Federal Open Market Committee meeting is scheduled to take place this Wednesday, 7th May 2025, with market participants highly expecting the interest rates to be held stable in the 4.25%-4.50% range. As of writing, according to the CME FedWatch Tool, which tracks the likelihood of changes to the Fed Fund rates implied by 30-day Fed Funds futures, the probability of interest rates staying the same stands at 94.8%, while the chances of a 25-bps rate cut stand at just 5.2%.
Since the Federal Reserve started its policy pivot in September last year, a total of 100 bps of rate cuts have been initiated, and the rates have been held stable since late last year. A lot has changed since the pause in the rate-cut cycle was started, especially after President Trump’s aggressively protectionist policy stance with tariffs unveiled for countries worldwide, potentially disrupting global trade. This caused the Fed to raise inflation forecasts for 2025 and 2026, while reducing growth expectations for the year. The markets reacted accordingly, with a major risk-off investor sentiment leading equities into a correction, a weakening US dollar, and a historical rally in Gold due to safe-haven demand. Since taking office, Trump has pushed for lower interest rates and threatened to fire Fed Chair Jerome Powell mid-tenure, putting the central bank’s independence in question. However, the President clarified his statements recently, indicating no intention to fire Powell. Despite sustained criticism over the pace of rate cuts, the President suggested that he will likely allow Powell to complete his tenure, indicating the status quo with regard to the Fed’s independent decision-making.
Things for the US don’t look too rosy on the macro-economic front, as the US CB Consumer Confidence for April fell to 86, a level last seen during the pandemic in 2020, while the US GDP contracted by 0.3% in Q1 2025 on a quarter-on-quarter basis. The Chicago PMI for April came in lower than expectations at 44.6, while the Fed’s preferred measure for inflation, the Core PCE Price Index, was unchanged on a month-on-month basis, compared to a consensus of a 0.1% rise. On the labour front, the JOLTS Job Openings for March fell to 7.192 million, compared to expectations of 7.490 million; the ADP Nonfarm Employment for April rose by 62K, lower than expectations of a 114K rise, and the latest initial jobless claims report indicated 241K claims filed, higher than forecasts of 224K.
As of 30th April, Fed Fund futures indicated 4 rate cuts by the end of 2025, taking the terminal rate to around 3.31%. A positive data release during the last week came from the Nonfarm Payrolls report, coming in at 177K, higher than market forecasts of 138K. This caused a significant change in expectations of the Fed’s policy path, with the market participants now expecting slightly more than 3 rate cuts, implying a change of 0.8% in interest rates by the end of 2025, taking the terminal rate to around 3.51%.
Although Trump’s administration has shown a renewed effort in trade negotiations with key partners, especially a softer stance on China, the economic outlook remains uncertain. The Fed stands at a critical juncture, with inflation expected to heat up following the implementation of tariffs, while a slowdown in economic growth could impact the labour market going forward. For now, the data-dependent Fed remains in a “wait and watch” mode, with rate cuts expected to restart in July.
It is highly expected that the Central Bank of the UAE will follow the move of the Federal Reserve during the week, given that the UAE dirham is pegged to the US dollar. If interest rates are held stable, the Central Bank of the UAE would most likely keep the Base Rate applicable to the Overnight Deposit Facility (ODF) stable, shadowing the Fed’s move. The benchmark interest rate is anchored to the US Fed’s IORB and signals the general stance of monetary policy in both countries.
U.S. Fed Poised to Hold Rates : Century Financial
