The Fed will face a straightforward decision to keep policy setting steady at the FOMC meeting this week. First, financial conditions have eased since Liberation Day and there are no signs of market dysfunction. If anything, selected asset classes appear to be displaying signs of (arguably too much) economic optimism. From this angle, there is no urgency for the Fed to react. Second, the labour market has been incredibly resilient. Bond bulls were hoping for a crack in NFP (or a sharp rise in unemployment rate). That has proven elusive, and it will be at least another month of waiting before we get another reading. Against this backdrop, the Fed would be better off waiting. In any case, policymakers would probably want more clarity on how trade negotiations play out. Thus far, no trade deals have been announced. Third, the jury for inflation is probably still out. The collapse in brent crude prices below USD 60 / bbl should cool headline inflation even as tariff-induced price pressures materialise and would likely drive a wedge between headline and core CPI. Given these conditions, Fed Chair Powell would likely be non-committal while reiterating the Fed’s independence. Accordingly, the bias for frontend USD rates may be skewed modestly higher in the coming few trading days.
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