US May 2025 FOMC: Fed “can wait” amidst tariff risks

• The Fed in its 6/7 May 2025 Federal Open Market Committee (FOMC) meeting, unanimously decided to maintain the Fed Funds Target Rate (FFTR) at a range of 4.25%-4.50%, for the 3rd straight meeting and in line with market and our expectations. The Fed Board of Governors of the Federal Reserve System also voted unanimously to keep the interest rate paid on reserves (IOER) balances unchanged at 4.40%, maintain the pace of the monthly reduction of US Treasuries at US$5 bn and the reduction of mortgage-back securities (MBS) at US$35bn, as well as approve the establishment of the primary credit rate at the existing level of 4.5%.
  
  
• The key change in the text of the May monetary policy statement (MPS) was that the Fed now warned that “uncertainty about the economic outlook has increased further” (from “uncertainty around the economic outlook has increased” in the Mar statement) while adding a new warning that the committee “judges that the risks of higher unemployment and higher inflation have risen”. FOMC Chair Powell assured markets the Fed officials are not in a hurry to adjust interest rates citing “costs of waiting are fairly low” while warning that the “tariffs so far significantly bigger than expected and “great deal of uncertainty about tariffs”, and if the large increases in tariffs as announced are sustained, it could lead to higher inflation and lower employment.
  
  
• FOMC Outlook – Pushing back the rate cut timeline while keeping faith with the three 25-bps rates cut view for 2025. Given the Fed is advocating for patience even as it has upped its warnings about the risks of higher inflation and unemployment due to the tariffs, we continue to hold our view of three 25- bps cuts in 2025, though we have decided to push back the expected timeline to Sep, Oct and Dec FOMC, bringing the Fed Funds Target rate (FFTR) to 3.75% (upper bound of FFTR) by end-2025 (previous timeline was one cut in each quarter, 2Q (Jun), 3Q, and 4Q). We are also keeping our view for the two rate cuts for 2026, implying a lower terminal FFTR of 3.25% in 2026.

May 2025 FOMC: Another well-anticipated pause as the Fed can afford to wait

The US Federal Reserve (Fed), in its 6/7 May 2025 Federal Open Market Committee (FOMC) meeting, unanimously decided to maintain the Fed Funds Target Rate (FFTR) at a range of 4.25%-4.50%, in line with market and our expectation. This was the third consecutive policy pause after the 100-bps cut in the last three meetings of 2024. Separately, the Board of Governors of the Federal Reserve System also voted unanimously to keep the interest rate paid on reserves (IOER) balances unchanged at 4.40%, maintain the pace of the monthly reduction of US Treasuries at US$5 bn and the reduction of mortgage-back securities (MBS) at US$35bn, as well as approve the establishment of the primary credit rate at the existing level of 4.5%, as stipulated in its May 2025 Implementation Note.

Our FOMC Outlook – Pushing back the rate cut timeline while keeping faith with the three 25-bps rates cut view for 2025

The latest FOMC decision looked to have affirmed the view that the Fed will continue with its “wait-and-see” approach to gain more clarity on trade and other policy measures but now with greater upside risks associated with inflation and unemployment, given that the tariffs announced were significantly bigger than expected.

Going forward, we keep the view that the impact of the US trade policies will be significantly weaker growth outlook for the US and Asia (but not amounting to outright recession in US although that probability is higher at 40% now), accompanied by higher US inflation outturns, which we assume to be a one-time spike in prices before coming off from the headline inflation sometime next year. Given the Fed is advocating for patience even as it has upped its warnings about the risks of higher inflation and unemployment due to the tariffs, we continue to hold our view of three 25-bps cuts in 2025, though we have decided to push back the expected timeline to Sep, Oct and Dec FOMC, bringing the Fed Funds Target rate (FFTR) to 3.75% (upper bound of FFTR) by end-2025 (previous timeline was one cut in each quarter, 2Q (Jun), 3Q, and 4Q). We are also keeping our view of the two rate cuts for 2026, implying a lower terminal FFTR of 3.25% in 2026. 

According to Bloomberg’s WIRP (as of 8 May) with reference to Fed Funds Futures, markets are pricing a moderately low 20.1% probability of a rate cut in the 17/18 Jun 2025 FOMC. The probability rose significantly to 82.1% for a rate cut in Sep FOMC, which is in line with our base case projection. And according to the CME FedWatch Tool, markets are pricing in a similar 20% probability for a 25-bps rate cut in Jun and a higher 94.8% for a cut by the Sep (as of 8 May).  

The next FOMC meeting will be on 17/18 Jun 2025 (Decision on 19 Jun 2am SGT), accompanied by Powell’s press conference and an updated Summary of Economic Projections (SEP).

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Alvin Liew
Senior Economist
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