We expect the Fed to hold rates steady for the second straight meeting and, given heightened uncertainty, provide limited guidance about the policy path ahead. The updated Summary of Economic Projections is likely to show a median expectation of two rate cuts this year, unchanged from December. We do expect a slightly hawkish signal via the SEP projections that show higher inflation, somewhat weaker growth, and an unchanged forecast for the unemployment rate this year. We expect the median 2025 GDP growth forecast will be revised down 30bp to 1.8% and the projection for core inflation to rise to 2.8% from previous 2.5%. The median unemployment rate projection should increase slightly to 4.4%. We now don’t expect a change in QT considering that the debt ceiling issue is on abeyance till 30th Sep as yesterday the Senate passed a Republican spending plan, averting a US government shutdown. The Trump administration seems to be willing to endure short-term pain as it tries to rebalance the US from a consumption-driven economy with a large trade deficit into a manufacturing powerhouse. Its strategy relies on deregulation, privatisation, a shrinking public sector, tariffs, and efforts to weaken the dollar. There is a growing risk that the administration’s policy experiment leads to much weaker growth, lower bond yields, wider credit spreads and weaker equity markets in the coming quarters. So, while the Trump put is not there at all, Fed by it’s dual mandate is bound to react if it’s employment mandate forces it to cut. We expect 2/3 NFP readings of <50k might be sufficient to push Fed for at least 3 rate cuts in REMCY25. Hence the Fed Put is definitely there just waiting to unfold. The Fed is likely to hold steady for now, but if downside risks to growth and employment outweigh inflationary pressures from tariffs, it may ultimately be forced into deeper rate cuts than what the March DOTS might show. We continue to remain bullish on long end USTs but are waiting for opportune levels to enter longs.
