Policy stance remains cautious despite pressure
The Federal Reserve decided to keep interest rates unchanged following its latest policy meeting, resisting growing political pressure to accelerate rate cuts. The central bank left its key overnight rate in the 4.25% to 4.50% range, maintaining its cautious stance in light of persistent inflation risks and economic resilience.
The decision drew dissent from two Fed governors appointed by President Donald Trump, who share his view that monetary policy is currently too restrictive. However, Fed Chair Jerome Powell emphasized that no decisions had been made regarding potential changes in September, signaling a continued wait-and-see approach.
Market reaction reflects shifting expectations
Following the Fed’s announcement, Treasury yields and the U.S. dollar rose, while equity markets pulled back. The S&P 500 declined slightly, and the Russell 2000 index, which represents smaller-cap stocks, dropped 0.47%, underperforming large caps. Investors, who had previously anticipated a September rate cut, adjusted their expectations. The CME FedWatch Tool showed the probability of a September cut falling to 46%, down sharply from 65% the previous day.
Bond yields also responded, with 10-year and 2-year Treasury yields both rising by about two basis points. Analysts noted that investor positioning had leaned toward a more dovish signal, amplifying the market’s response to the Fed’s neutral tone.
Uncertainty drives cautious investor outlook
With the Fed offering little forward guidance, markets are now focused on upcoming data releases for inflation and employment. These will be critical in determining whether a rate cut is likely later this year. While Powell noted the economy remains “resilient,” he reiterated that rates are still “modestly restrictive,” supporting a continued conservative approach to monetary policy.
Some strategists remain optimistic about potential rate reductions by 2025, with projections of three to five cuts. Still, most agree the next two months of data will be pivotal in shaping policy decisions. As a result, short-term uncertainty is likely to persist, particularly for interest rate-sensitive sectors and small-cap equities.
Dollar gains amid rate stability
The Fed’s decision helped lift the U.S. dollar to a two-month high, with the dollar index rising 1% on the day. Although the currency remains down 8% year to date, the pause in expected easing temporarily strengthened the dollar against major peers. Analysts at BofA Global Research noted that while medium-term expectations still point to weakness, near-term momentum now appears more balanced.
Higher U.S. rates continue to offer relative support for the dollar, especially against other developed market currencies. However, some experts caution against overinterpreting short-term movements in currency or bond markets, emphasizing the Fed’s steady policy approach and data-dependent outlook.
