Fidelity Insights | The Fed remains on hold, but the future path of interest rates is uncertain

The Federal Reserve kept interest rates unchanged as expected by the market. However, Fed Chair Jerome Powell indicated that he would remain on the board after stepping down as chair, and with the Middle East conflict unresolved, this implies continued oil price shocks, adding uncertainty to future policy directions. Fidelity's macroeconomic experts and Asia economic analysts provide investors with insights into the factors that will influence interest rate prospects. For more video updates and market analysis articles, please follow @FidelityInternational

The Federal Reserve adopts a wait-and-see approach

The US Federal Reserve maintained interest rates as expected by the market, keeping the federal funds rate target range at 3.5% to 3.75%. In the post-meeting statement, the Federal Open Market Committee (FOMC) unsurprisingly reiterated thatGeopolitical risks add uncertainty to the dual mandate of controlling inflation and maintaining employment. The committee also raised its assessment of inflation in the statement, but emphasized that this was mainly due to rising energy prices. In addition, three committee members voted against the decision, disagreeing with retaining the forward guidance that leaned towards easing. These factors have led toThe overall statement carried a noticeably more hawkish tone。

At Powell's last press conference as Fed Chair, it was clear that he placed greater emphasis on the committee consensus in terms of forward guidance. He reiterated thatthe 'majority' of the committee members do not foresee any possibility of future rate hikes, and the entire committee is currently adopting a wait-and-see stanceas they continue to assess how the evolving impacts will unfold.

Change in chairmanship influences interest rate direction

In fact,The biggest news from the press conference was not about the discussion regarding the interest rate outlook (which remains shrouded in uncertainty), but rather Powell's revelation that he would continue serving as a Fed governor after stepping down as chairman on May 15. He pointed out that the current legal challenges against the Fed are unprecedented, thus necessitating equally unprecedented actions. While this move was not entirely unexpected, as Powell had previously indicated that he might stay on as a governor to uphold the integrity of the Fed system after relinquishing his role as chairman,this decision undoubtedly adds extra uncertainty to the future path of interest rates.。

Looking ahead,The interest rate outlook for the remainder of the year will increasingly depend on how long the Middle East conflict persists. Our base case forecast remains slightly more dovish than what the market expects, as we anticipate that incoming Chair Kevin Warsh and the entire committee will cut rates at least once before the end of the year to address the blow to economic growth caused by the energy shock. However, with the rising risk of a prolonged blockade of the Strait of Hormuz, there is a clear possibility that the energy price shock could spread, evolving into a broader inflationary shock affecting the entire economy.We still expect one rate cut this year, but the risks have clearly shifted towards 'standing pat' for the remainder of the year.

Asian central banks are likely to remain cautious

In Asia, central banks as a whole have also adopted a 'wait-and-see' approach.The ongoing blockade of the Strait of Hormuz, along with an increased risk of a prolonged closure, means that central banks will further delay the easing cycle and may even roll back some easing measures. Given the re-emergence of inflationary pressures, weakening external conditions, and downside risks to economic growth, central banks will be prompted to remain cautious. Markets have already priced in these factors,For most Southeast Asian central banks, policy normalization has effectively come to an end, and policy rates are expected to remain largely unchanged by the end of this year.。

The medium-term outlook remains highly uncertain, thusWe believe that regional central banks will not act preemptively but are more likely to continue adjusting monetary policy flexibly in response to evolving conditions.Given the limited room for monetary policy maneuvering and the significant impact of the energy shock on Asia,If the government needs to introduce supportive policies, they are likely to be mainly fiscal measures, rather than relying on monetary policy for support.

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