The US Federal Reserve (Fed) has opted to keep US interest rates unchanged at 4.25%–4.5%, a move widely expected by global and UK investment strategists. However, alongside the Fed’s decision came a cautious message- that of growing risks of stagflation in an increasingly uncertain economic landscape. UK-based financial advisers may now be weighing how this outlook could influence asset allocation and broader investment positioning.
Investment strategists have been sharing their reaction to these latest Fed interest rate data as follows:
Garry White, Chief Investment Commentator at Charles Stanley, comments: “Donald Trump may want an interest rate cut now but, with the US economy continuing to muddle through, he will have to wait. The Fed made the right decision leaving interest rates unchanged until it has more clarity on the impact of the president’s trade policy on the US economy. The Fed had no reason to cut. Recent data from the US economy has been good, underlined by a recent solid jobs report. Without a major fall in jobs growth there is no urgency for a rate cut until tariff’s impact on inflation is clearer. There was a negative print of GDP for the first quarter, but this was due a to rush of imports ahead of the expected introduction of tariffs. It will take some time to see the real impact of the trade policy on the economy.”
Lindsay James, investment strategist at Quilter said; “Much to Donald Trump’s chagrin, the Federal Reserve has chosen to hold interest rates in the face of weakening economic data. The Fed is keen to stress the potential for higher inflation as a result of the President’s policies and thus rate cuts cannot be expected by the market until late July at the earliest. For now the focus for the Fed is clearly on maintaining price stability in the face of anticipated inflationary pressures from tariffs, even though it hasn’t yet shown up in the hard data.
“Whilst it has a dual mandate, which also requires them to set policy in order to pursue maximum employment, so far the labour market has been holding up better than many expected with the recent labour market report showing a healthy 177,000 jobs were added in April, whilst unemployment remains at 4.2%. The Fed, however, expects unemployment to rise too, making its task incredibly tricky and increases the risk of policy misstep. Unfortunately for the President, that means Jerome Powell and the FOMC will likely act cautiously.
“More clarity may emerge by July 8th, the end of the 90-day negotiating window, when it may become clearer to what degree reciprocal tariffs could be reintroduced, cancelled, or further paused, leaving a 10% baseline tariff and sector specific tariffs. However, this still leaves the issue of an effective trade embargo with China to resolve, and as yet no clear sign of progress.
“With the Drewry World Container Index showing shipping rates have now fallen around 45% on the crucial Shanghai to Los Angeles route since inauguration day, it’s an indicator that demand has sharply dropped as trade is put on hold, pending a hoped-for agreement. The longer both sides hold out, the harder it will be to avoid the inevitable price pressure as stockpiles are steadily eroded.
“The conditions are ripe for markets to be buffeted for a while longer as you have the threat of rising inflation and unemployment during weakening economic growth. The Fed is in for a tough few months to come as a result.”
Richard Flax, Chief Investment Officer at Moneyfarm said: “As widely expected, the Federal Reserve held the interest rates unchanged for a third time in a row, with no certainty on the timing of potential cuts. While there are expectations of President Trump’s tariffs pushing inflation higher, it might also be offset by a weakening economy. Unemployment data, a key indicator, is holding steady for now at 4.2%, but any softening here could likely prompt the Fed to react.
The bigger concern for investors is the risk of stagflation – where growth slows, and inflation rises.
The Fed is unlikely to commit too firmly to a rate-cut path before the 90-day pause on new tariffs ends on 8 July. Much of the current uncertainty has yet to filter through to the real economy. While there are anecdotal reports of inventory shortages, we’ve not yet seen a material impact on consumer prices. The next few macro and CPI data tranches will be critical in shaping the Fed’s outlook.”
Edward Harrold, Fixed Income Investment Director at Capital Group said: “The Federal Reserve has decided to hold interest rates in the face of strong economic headwinds and widespread market uncertainty. This decision reflects ongoing concerns about inflation and the mixed signals from various economic indicators.”
“Tariffs have led to market fluctuations, increasing volatility in both equities and fixed income markets, and raising concerns about recession and stagflation. However, since the start of the year, high-quality global corporate bonds have performed well, delivering positive returns and diversification benefits.”
“Given the high level of uncertainty, we remain disciplined and focused on bottom-up security selection. We are closely monitoring valuations to identify attractive entry points for building exposure in high conviction names. We see opportunities in the pharmaceuticals sector due to its defensive nature during times of volatility. US utility names are also appealing because of their domestic focus. In the banking sector, we favour regional european banks with robust idiosyncratic stories that provide some insulation from tariff volatility.”
“In this environment, it is crucial to maintain a flexible and well-diversified fixed income portfolio with a long-term focus. Bonds continue to fulfil their traditional role in portfolios by providing a short-term offset to stock market declines. Prioritizing time in the market over attempting to time the market can help investors navigate through volatility and uncertainty.”
Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity Fund said: ‘Unsurprisingly, the Fed held rates, with little reason to cut now seeing the continuing constructive hard economic data, but risk of higher inflation. It would not have served any particular fundamental economic purpose to cut rates just yet.’
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) said: “That the Fed was going to stay on hold was overwhelmingly expected by market participants. More interesting is the tough trade-off inherent in the central bank’s dual mandate: the US tariffs increase the probability of higher inflation but also of higher unemployment.
So far, hard data, including on the labour market, have shown a picture of resilience, suggesting that the Fed is likely to continue to focus on inflation, keeping rates on hold for a while longer.
“But more timely and frequent surveys on consumers, businesses and investors have all deteriorated, suggesting that uncertainty on whether the tariffs will be enacted is causing some damage. In a way, this damage is also the trigger for a path to resolution.
“Looking forward, it looks as if economic and market pressure has pushed the US Administration to adopt a slightly softer stance, opening the door to negotiations and tilting the balance of risks towards de-escalation rather than further escalation. This could be a relief for markets.
“However, US negotiations are likely to take time, especially with China, as the US Administration hinted recently. So the stagflationary impulse, meaning lower growth and higher inflation, hasn’t disappeared. The back and forth in US trade policy, with uncertainty around potential deals in the making, and tariffs announced and (temporarily) repealed, is what has kept volatility elevated, even though markets have started to rebound lately.
“A key aspect of our strategy is our analysis on US policy sequencing: the negative impact of tariffs now, followed by the positive impact of tax cuts and deregulation further down the line.
“While the former has obviously spooked sentiment, the latter should be a tailwind for the global economy and markets, potentially offsetting some of the downside risks from higher tariffs.
“The rest of the world is likely to see fiscal stimulus, too, alongside monetary stimulus in the form of interest rate cuts, which are especially likely in the Eurozone, where inflation is lower, than in the US, where it’s stickier, with the UK in between.
What this means for the portfolio
“Because of likely extra fiscal spending, including on defence and infrastructure, we’ve recently increased exposure to European equities. A few weeks ago, when we rebalanced our portfolios, we decided not to go all the way to our previous equity overweight. We stopped at ‘roughly neutral’. This positioning caught the recovery in equity markets through the latter part of April well.
“During this process, we also kept some cash to redeploy. Our view was and still is that cash returns will be lower going forward due to the interest rate cuts we expect, so we wanted to redeploy that cash if opportunities arise. That opportunity presented itself in high-yield bonds. We’ve long held a reduced exposure to high-yield bonds because valuations weren’t compelling. The difference in high-yield interest rates compared to safe government bonds was too low to warrant the extra risk.
“But now, spreads have widened to a level we think offers a reasonable compensation for the risks. So, we’ve recently raised exposure to high-yield bonds to a more neutral stance, funded by cash.
“We’ve argued before that liquidating one’s investments at a loss when markets fall and attempt to get back in the market later on, inevitably paying a high price, makes limited sense.
“Rather than ‘timing the market’ we think it’s often more sensible to spend ‘time in the market’, compounding return and staying diversified across regions and asset classes.
“This is because, this way, a wobble in one part of the portfolio, say, equities or corporate bonds, can be offset by a gain elsewhere, for example via our gold or government bond positions, which tend to appreciate when uncertainty rises.
Importantly, this doesn’t mean staying static. Rather, active portfolio management is a key pillar of our investment strategy.
“So, recognising that US equity valuations are still on the demanding side, especially in technology, we continue to like our diversification strategy away from broad US equities and into an equal-weight index. The index gives a higher weighting to more attractively valued sectors, such as US industrials and financials, which could also benefit from trade protection, fiscal stimulus and financial deregulation.
“Finally, we have an overweight in short-dated government bonds, a defensive positioning to mitigate risks. And we prefer European high-quality corporate bonds to their US counterparts, also underweighting US Treasuries as we think a high government debt level is a risk.”
Hetal Mehta, Head of Economic Research, St. James’s Place says: “It was of no surprise that the Fed left rates unchanged this month, but it did acknowledge the tensions between weaker growth and higher unemployment that tariffs bring about. In terms of policy response, Powell is currently trying to tread a fine line; he seemed at pains not to appear to be favouring either part of its dual mandate.
“It’s possible the Fed doesn’t move pre-emptively to prevent a rise in unemployment or a recession to exert its inflation-fighting credentials and independence. This might mean faster, more aggressive moves further down the line once more evidence of economic weakness appears in the hard data”.
