USD Rates: The Fed stays sidelined
BOE, SNB, and BSP previews.
Group Research - Econs, Eugene Leow19 Jun 2025
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Overnight, the Federal Reserve held rates steady at 4.5% as widely expected. With economic data insufficient to prompt Fed action just yet, the focus lies squarely on the Fed’s forward guidance. We lay out some observations below. First, the SEP shows a more stagflationary projection with PCE inflation revised higher and the unemployment rate higher for 2025 and 2026. Note that the higher inflation forecast came about despite muted actual inflation over the past two months. There has been little to no impact on headline / core inflation from tariffs thus far but Fed Chair Powell has indicated that some impact over time would be inevitable. Second, the Fed kept the dot plot to two cuts for this year but reduced the subsequent two years by one cut each. Note that given the higher inflation expectation, two cuts for 2025 should be seen as dovish. The projections for 2026 and 2027 look hawkish. Note that even in 2027, the Fed would not be back at its own estimate of neutral (kept unchanged at 3%. There is also a notable split amongst Fed officials (7 indicating no cuts for the year and 8 indicating two cuts).



From a market’s perspective, USTs had an intraday rally that was largely faded by the close. Short-term rates are still pricing in two cuts each for 2025 and 2026 while 10Y yields ended close to 4.40%. With the Fed out of the way and no key data for some time, attention will shift back towards the Israel-Iran conflict and trade / tariffs negotiations. On the geopolitics front, market participants have been complacent, with sentiment generally holding up. However, should the US become involved in Israel-Iran conflict, some sentiment deterioration would be warranted. We also note that the reciprocal tariff deadline is approaching and that trade deals have been scarce. Another fresh set of tariff announcements could provide another jolt to the market.


Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]
 



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