Federal Reserve Holds Firm as Trump Disrupts the Narrative
The US Federal Reserve has opted to keep interest rates unchanged, sticking to its strict data-driven approach on future monetary policy decisions—much to the frustration of those hoping for a swifter reduction. The central bank maintained its target range for the federal funds rate at 4.25% to 4.50%, reiterating that any future adjustments would be guided by incoming economic data and potential risks.
Given this cautious stance, the March policy update was effectively ‘hawkish’, which under normal circumstances might have prompted a relief rally for the US Dollar, following a recent period of weakness. However, any spotlight on the Fed’s decision was swiftly overshadowed by an unexpected intervention from President Donald Trump.
Trump took to social media to declare: “The Fed would be MUCH better off CUTTING RATES as U.S. tariffs start to transition (ease!) their way into the economy. Do the right thing. April 2nd is Liberation Day in America!!!”
Ordinarily, an independent institution like the Federal Reserve would not expect political interference of this nature, yet Trump’s comments make it clear the White House is intent on pushing for lower interest rates—despite mounting evidence of rising inflation. This stance flies in the face of the Fed’s core mandate to steer inflation back towards its 2.0% target.
For investors, Trump’s intervention injects yet another dose of uncertainty into US economic policy, and if there’s one thing financial markets despise, it’s unpredictability. Since taking office, Trump’s administration has provided uncertainty in abundance, which has contributed to the Dollar’s persistent weakness. As a result, by Thursday, the GBP/USD exchange rate was hovering close to 1.30—whereas, under normal conditions, the Fed’s position would have likely kept it in the lower 1.29s.
The Federal Reserve remains steadfast in its view that now is not the right time for rate cuts. It points to continued solid economic growth, a stable labour market, and persistently high inflation as justification for its current stance. However, with growing uncertainty clouding the economic outlook, the Fed maintains it will closely monitor risks that could impact its dual mandate of maximum employment and stable prices.
Markets Look Past Powell’s Warnings, Focus on Fed’s Softer Stance
Federal Reserve Chair Jerome Powell highlighted the growing uncertainty surrounding the economic outlook, particularly the effects of tariffs on inflation. However, financial markets largely chose to overlook these concerns, instead honing in on the Fed’s more accommodative shift in balance sheet policy, rather than the slightly more hawkish stance reflected in interest rate projections.
US Treasury yields dropped in response, with the two-year note slipping below 4% as traders recalibrated their expectations for the Fed’s next moves. Despite this market reaction, Powell’s remarks underscored the central bank’s continued reliance on economic data. With uncertainty on the rise, future policy decisions will be dictated by inflation trends and employment figures in the months ahead.
Bank of England Set to Hold Rates as Traders Eye Policy Signals
Market attention today is firmly on the Bank of England (BoE) as it announces its latest interest rate decision. This morning’s UK labour market report aligned closely with expectations, showing wage growth remaining high and unemployment steady at 4.4%.
Given the BoE’s well-established pattern of cutting rates once per quarter, it is highly unlikely that the Bank Rate will move from its current level of 4.5%. Consequently, a significant market reaction is not expected, as traders have already priced in a no-change decision. However, the focus will be on the voting split among policymakers, particularly whether Alan Taylor aligns with previous dissenters in advocating for a further rate cut.
One of the biggest surprises in February was the 7-2 vote split, with Catherine Mann shifting from the Bank’s most hawkish stance to one of its most dovish, joining Swati Dhingra in calling for a larger 50-basis-point cut. It is likely that these two will once again push for looser policy, but attention will also be on Taylor, who backed consecutive cuts in December and has since argued that weak demand is the dominant factor shaping inflation trends. However, the majority of the committee remain cautious, fearing that supply constraints will sustain elevated wage growth and inflation. Private sector wages continue to grow at over 6%, while services inflation remains stubbornly around 5%, complicating the BoE’s decision-making at a time of economic stagnation. Given these dynamics, there is little in the data to suggest a shift in the Bank’s cautious policy stance. The BoE is also likely to consider global risks, including trade tariffs and geopolitical developments in the Middle East, which could impact inflation.
Looking ahead, the UK’s upcoming budget announcement could pose a greater risk to the pound. Chancellor Rachel Reeves faces a difficult balancing act—either cutting spending, raising taxes, or potentially unsettling the gilt market. In the short term, the pound’s outlook appears tilted to the downside, though global uncertainties add to the unpredictability.
