Caution expected from US Fed | Australian Markets

There is growing consensus amongst market economists that the US Federal Reserve will undertake a wait and see strategy out of its scheduled assembly this week.

MFS Investment Management chief economist, Erik Weisman encapsulated common sentiment when he stated that the uncertainty generated by US tariff coverage was one of the important thing elements which might affect the Fed’s place.

“The chaos of US tariff policy leaves the future macroeconomic landscape especially challenging to discern.  With goods prices likely to rise considerably and the labor market likely to soften, the Fed’s dual mandate points only to ambiguity,” Weisman stated.

“Overlay the tariff confusion with upcoming and uncertain changes in fiscal policy, regulatory policy, immigration policy, and the effects of DOGE, and one could hardly blame the Fed for desperately wanting more time and clarity before it signals any meaningful change in its policy stance,” he stated.

Weisman stated that the Fed can even be mindful that tariff-induced inflation, even when theoretically seen as momentary, might produce more persistent realized inflation, coming so quickly after the pandemic-related inflation that’s so contemporary in people’s minds.

“Thus, the Fed will be reluctant to loosen policy without clear signals that the economy is weakening materially.  In other words, in the absence of real economic deterioration, the Fed is likely to be late with cuts if needed,” he stated.

Coming from the considerably totally different perspective of US credit markets, Fidelity International portfolio supervisor, Rick Patel stated that his firm’s view was that the Fed Funds charge of 4.25% is just too high relative to expectations of restricted structural growth and inflation charges.

“The Fed appears reluctant to cut rates based on their recent commentary and are likely to require a catalyst to do so. A deterioration in the labour market might be a catalyst as they look to protect the maximum employment side of their dual mandate,” he wrote.

“There are many unknowns forward and volatility is prone to persist because the scenario round tariffs stays fluid and ever evolving. What we are able to say with confidence is that in response to this difficult market context, an lively and nimble strategy to investing is more important than ever. “