Federal Reserve Expected to Hold Rates at 4.25%-4.5% Amid Global Uncertainty

The Federal Reserve is anticipated to maintain interest rates at 4.25%-4.5% amidst heightened uncertainty from Middle East tensions, volatile oil prices, tariff disputes, and a recent U.S. debt downgrade by Moody’s. These factors complicate the economic outlook and policy decisions, despite political pressure from President Trump to cut rates. Analysts expect the Fed to hold off on cuts until there is clearer evidence of economic weakness or easing inflation.

The Federal Open Market Committee (FOMC) faces a complex landscape this month, with increased geopolitical conflict in the Middle East, ongoing uncertainty over tariff agreements with key partners, and a downgrade of U.S. credit by Moody’s. President Trump’s reaction to the FOMC’s decision not to cut the base rate adds another layer of complexity. Most analysts predict the base rate will remain steady at 4.25 to 4.5%, a stance seen as relatively tight by dovish economists who argue the economy is coping relatively well according to data.

David Doyle, head of economics at Macquarie Group, described the Fed as walking a “tightrope.” He expects the FOMC to hold rates steady and anticipates that the market reaction will be driven by the communication and potential guidance of further cuts. Doyle suggests that the dot plot may push out the suggested timing of rate cuts, with 25 basis points of cuts in 2025 and 75 basis points in 2026. Chair Powell may describe recent inflation developments as encouraging but downplay their relevance given the uncertainty ahead due to tariffs, fiscal policy, and the recent spike in oil prices due to geopolitical developments.

Tensions in the Middle East are escalating, with Israel and Iran launching attacks on one another. President Trump posted on his social media site that the U.S. has complete control of the skies over Iran, suggesting that Iran’s leader, Ayatollah Khamenei, is an easy target. The escalating tensions pose a question over oil supply, with Iran threatening to close the Strait of Hormuz, which accounts for about 20% of global petroleum liquids consumption. Vikas Dwivedi, global energy strategist at Macquarie, expects oil prices to remain volatile with an upward trend for the next few weeks. If Iranian oil export infrastructure is damaged, oil prices could trend towards $100 due to the direct loss of Iranian exports and the risk premium associated with Iran’s response.

Policy out of the White House is adding further uncertainty to the economic picture. Trump’s ‘Big, Beautiful Bill’ has raised concerns about its contribution to the U.S. national debt, despite some deficits being offset by inflationary but money-making tariff policies. Moody’s downgraded U.S. debt from Aa1 to AAA, pushing Treasury yields up and creating higher borrowing costs for the government. This move has potential trickle-down inflationary impacts on consumers. Another question is tariffs, with Powell signaling he is waiting to see if businesses pass on increased costs to consumers. Thierry Wizman, global FX and rates strategist at Macquarie, pointed out that level inflation data post-‘Liberation Day’ tariff announcements wasn’t a signal to bank on, writing that tariffs do matter or will matter. He believes that Powell will sound more ‘dovish’ next week than he did in May.

Powell also has to navigate the storm that may come in the form of President Trump, who has made it clear that he wants the Fed to cut rates. While Trump has stepped back from threats that made the market worry that the Fed’s independence might be under threat, he has made no secret of the fact he wants “too-late Powell” to cut the base rate. Powell has maintained that politics have absolutely no impact on the Fed’s decision-making. Richard Clarida, the former Federal Reserve vice chair from 2018 to 2022, said the White House will stop short of materially altering the central bank’s independence. He highlighted that stocks and bonds would be in for a shaky ride if the candidate for Fed chairman wasn’t viewed as truly independent or committed to bringing inflation down.