May 2025 FOMC Preview: Inaction is action (and a potential policy mistake)…
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.
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
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed's potential inaction may signal deeper economic concerns.
- 02Markets may react adversely to unexpected hawkish communications.
- 03Balance of Fed's decisions will significantly impact investor sentiment.
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.
Risks to this view
The primary risk is that the Fed's decision to pause evolves into a policy misstep if economic indicators demand a clearer course of action. Additionally, misalignment between markets and Fed communication could result in sharp market corrections.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, May 6th, 2025. Welcome back to the podcast, George. Hey, John.
Great to be back. Good to have you. So, all eyes on the FOMC meeting this week, and for our listeners' benefit, we're recording this episode on Tuesday, May 6th, and the conclusion of the FOMC meeting is on Wednesday, May 7th, with the release of the FOMC statement, as well as Chair Powell's accompanying press conference.
Again, no summary of economic projections. But before we jump into the Fed, let's catch up on what is a pretty heavy slate of developments across the macro and markets landscape. Sure.
Absolutely. And it's going to inform the Fed, too, so I think it's important to kind of level set where we are heading into the Fed meeting. We got a first negative GDP print.
We were discussing it last time we were on the podcast, but there was definitely risks to a negative number coming out, given the sort of big changes and pulling forward of activity impacting the net exports calculation, a lot of inventory kind of building up as a result of that, too. But at the same time, if you look at the final demand, there's been a pretty decent drop-off. And so I don't think it's just related to the tariffs.
I think there is and there has been weakness in the economy. And again, this is Q1 GDP before the tariff announcements, even though people were anticipating, it's still before the actual shock that we had in April. And then we also have gotten another NFP report under our belt.
There was some trepidation going into the number of concerns that it might start to capture some of these declines in government jobs that have been impacted by the doge effect, or just in general, just the shock from the tariff announcements. And in fact, the number surprised to the upside. So been a lot of sort of kind of macro developments.
I've been kind of saying the damage has been done, that the soft data this time, you shouldn't ignore it, that it is kind of indicative of where we're heading for the economy. But then you get a number like NFP, and that kind of throws in a wrench on that idea. So we're at an interesting crossroads.
Yeah, totally. For a split second, that weak data, sorry, the weak soft data was looking like the canary in the coal mine for the hard data, you know, after that GDP number. But then you get whiplashed by the employment report, which, as you say, caught many of us by surprise.
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