Fast reading
- The Fed opts to keep rates steady despite pressure from President Trump to cut.
- The BoE announced a 25bps cut to rates in its first meeting since sweeping US tariffs were announced last month.
- The US and the UK announce a trade deal has been reached between the two countries.
The US Federal Reserve (the Fed) opted to keep interest rates steady this week despite pressure from President Donald Trump to cut. Officials pointed to the risk of higher inflation and rising unemployment amid the ongoing fallout from the imposition of global tariffs.
It marks the third consecutive meeting where the Federal Open Market Committee (FOMC) left rates unchanged and leaves the federal funds rate in the 4.25-4.5% range.
“President Trump has pushed the Fed to cut interest rates, while Fed chair Jerome Powell has voiced concern that Trump’s tariffs could be causing ‘stagflation’,” explains Susan Hill, Senior Portfolio Manager for Money Markets at Federated Hermes. “While threats to fire Powell have been rescinded, the tension remains,” she continues.
“In our view, the Fed must continue to work independently from what the White House wants, continuing their “wait-and-see” approach as tariffs-related news continues to roil markets.”
In our view, the Fed must continue to work independently from what the White House wants, continuing their “wait-and-see” approach as tariffs-related news continues to roil markets.
US-UK trade deal
British Prime Minister Keir Starmer and President Trump announced on Thursday that a trade deal had been reached between the two countries, neatly coinciding with the 80-year anniversary of Victory in Europe (VE) Day.
Earlier that day, the Bank of England (BoE) announced a 25bps cut to interest rates following its first meeting since the US tariffs were announced last month.
Markets have been volatile and uncertain since the sweeping US tariffs were announced on 2 April, with leading indices oscillating over the past month.
Asian currencies, however, and particularly the Taiwanese dollar, have soared in the weeks since, bringing into question the stability of the US dollar as a traditional ‘safe haven’ for investors.
“The US dollar has come under pressure against a broad basket of global currencies, weighed down by recession fears and uncertainty around future trade policy,” says Hugh Shepherd, Equity Investment Specialist at Federated Hermes Limited.
“In turn, investors have begun reassessing their US exposure amid growing doubts over prospective trade agreements and concerns over the broader growth outlook. Asian currencies have notably strengthened, with Taiwan leading the move – supported by the country’s substantial holdings of US-dollar assets, as exporters look to convert US dollars into local currency and domestic financial institutions address imbalances,” he adds.
Figure 2: How have Asian currencies fared against the dollar?
Adapting to uncertain conditions
“The word that best describes economic conditions right now has to be ‘uncertainty’. We hear it frequently on earnings calls from investors and across the capital markets, from all participants,” says Mitch Reznick, Group Head of Fixed Income – London, at Federated Hermes Limited, echoing the language shared by US policymakers on Wednesday.
“We don’t know yet what the medium and long-term effects [of the rise in trade tensions] will be because it’s still unclear what the global tariff regime is going to look like,” he continues.
Amid the uncertainty, Reznick says the credit team’s outlook remains “constructive on a total return and an all-in-yield basis”, but notes that, while credit markets remain attractive, there remains the need be positioned for “a potentially long period of uncertainty – which means being positioned in higher-quality credit and in sectors that are less vulnerable to an extreme tariff regime”.
The risk of prolonged global trade negotiations are having a ripple effect on business sentiment, says Louise Dudley, Portfolio Manager for Global Equities at Federated Hermes Limited.
“Trade negotiations continue to feature highly in investors’ minds, though the market impacts have lessened as companies respond conservatively and acknowledge how the changes will impact their business and ongoing profitability.” Dudley says.
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