May 2025 FOMC Preview: Inaction is action (and a potential policy mistake)…
At a Glance
The desk anticipates that the Federal Reserve will opt for a third consecutive pause in rate adjustments during the upcoming May FOMC meeting, a decision that could be perceived as a policy misstep. Per the full note from MUFG EMEA, this inaction may stem from the Fed's hesitance to act without clear data signaling the necessity for further rate cuts. The potential for a hawkish tone in the Fed's messaging could lead to a pullback in risk assets, as traders recalibrate their expectations for future monetary policy.
Key Takeaways
Full Analysis
What the desk is arguing
MUFG anticipates that the Federal Reserve will skip a rate adjustment for the third time in this tightening cycle. This decision to remain on the sidelines is fraught with risks, as the Fed could misinterpret economic signals and delay necessary rate cuts, which may compound existing market pressures.
Furthermore, if the Fed's communication takes a more hawkish tone despite a pause, risk assets could experience significant declines as investors adjust their expectations. The delicate balance the Fed must maintain makes their upcoming decision critical, particularly as economic conditions continue to evolve rapidly.
Where it sits in our coverage
Our current consensus target supports a modest recovery nearing 1.075, which aligns with MUFG’s cautious outlook on the Fed's potential decisions. However, if the Fed steers towards a more hawkish stance unexpectedly, it could lead to a departure from our projected range, indicating less alignment between the markets and the Fed's actions.
Among other forecasts, notable firms have set targets that reflect varying expectations regarding the Fed's policy. Specific published targets include:
- JPMorgan: 1.10 (Mar-26)
- Barclays: 1.08 (Mar-26)
- Goldman Sachs: 1.12 (Mar-26)
How other firms see it
Analysts at several leading firms share a similar sentiment regarding uncertainty surrounding the Fed's next move. For instance, Goldman Sachs and JPMorgan are aligned with MUFG's expectation of a cautious approach, while Bank of America posits a contrary view that supports immediate action rather than a pause.
- Goldman Sachs: aligned
- JPMorgan: aligned
- Bank of America: contrary
Market Implications
A continued pause by the Fed could lead to increased volatility in risk markets, especially if investor expectations are not met. A hawkish shift in rhetoric despite a decision to hold rates could exacerbate selling pressures across equities and other risk assets, necessitating cautious positioning.
From the original
George Goncalves, Head of Macro Strategy in the Americas previews our expectation ahead of the May FOMC meeting. We believe that the Fed will skip for a third time in the cycle and have a difficult time threading the needle and making everyone happy at this upcoming meeting. If t
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